Q: I’ve been with a big investment firm for about 7-8 years now. I like our adviser, but I keep hearing that the firm’s management fees are some of the highest in the business. Is it costly to switch to a new, perhaps fee-based adviser and get into new financial products?—Keith
A: Fees are important when it comes to investing, Keith, though different advisers provide different levels of service that don’t necessarily coincide with their fees. You shouldn’t always opt for the lowest fee option without assessing what you get in return for what you pay. But since fees are cumulative, you want to make sure you’re minimizing them to the extent possible.
Your firm tends to have fees that are high relative to some other mutual fund companies. I say this in particular given the size of some of their funds, which should allow them to reduce fees due to economies of scale. Your Series A mutual fund has an annual management expense ratio (MER) of 2.39%. The average Canadian equity mutual fund has a comparable MER of 2.42%.
Your fund has also lagged the index by 0.78%, but beat the average fund in its category by 0.3% over the past 10 years. This is net of MER fees, but does not take into account any front-end or back-end fees that an investor might pay.
If your adviser is providing you with comprehensive financial planning, I’d argue you’re getting more than most mutual fund investors for your fees. But how does that compare to the fee-based adviser you’re considering? Or a commissioned stock broker or do-it-yourself investing with exchange-traded funds (ETFs)?
Fee-based advisers charge a fee as a percentage of your investments. If your investment portfolio is under $500,000, fees will typically range from 1.5%-2.5%. If you’re assessing fees charged by a fee-based adviser, you have to look at any fees that might be embedded in underlying investments like mutual funds, principle-protected notes or ETFs that add to your overall fees.
A commissioned stock broker typically charges transaction fees of between 1% and 2.5% of a security purchase or sale. If you have modest portfolio turnover—say 20% annually—you would therefore be paying fees of between 0.4% and 1%.
If you’re buying and selling ETFs on your own, fees are typically $5 to $30 for every purchase or sale and embedded MERs on ETFs typically range from 0.25% to 0.5%. One broad-based Canadian equity ETF—Vanguard FTSE Canada Index ETF—has an MER of 0.1%, for example.
Mutual funds serve an important place within the Canadian investment industry. They’re an efficient way to invest small amounts of money in a diversified portfolio. They’re also good tools for investing on a regular basis and dollar-cost-averaging. And some mutual funds, especially those that are truly active funds instead of closet index funds, actually have a chance of beating the index and can do so over extended periods of time. The problem is that most mutual funds don’t provide out performance net of fees.
If you decide to leave your firm and its funds, one thing to watch on the way out is Deferred Sales Charge (DSC) fees. Funds sold with a DSC have penalties if they are sold during the initial years you own them. So consider how much of your portfolio can be sold without fees, as well as the fees that may apply on the balance. It may or may not make sense to incur DSC fees to sell some of your investments.
Leave your question for Jason Heath in the comment section below or email firstname.lastname@example.org and he may answer it in an upcoming column.
In conclusion, I think it’s always worth considering different investment options. Investment dealers are not fiduciaries and are not required to have your best interest in mind, although they may be great, honest advisers. Depending on the company they work for or the investment license they hold, they may also be limited in the investment options that they can provide for you.
Since you’re concerned about fees, how you invest your money going forward is going to be based on an evaluation of cost and benefit. And it’s a question that you need to ask because you owe it to yourself and to your retirement to do what’s best for you, no matter how nice your investment adviser is.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products.