The true price of financial advice

Transparency shines a light on the value of paying for help when investing



From the September/October 2016 issue of the magazine.

financial advice

( / Rober Owen-Wahl)

Many people worry about running out of money in retirement and some work longer than they would like to avoid such a possibility. Others take on part-time work after officially retiring to make ends meet.

It might be possible to avoid slaving away by learning how to manage money more efficiently. Those who do might save more than they’d earn by working a part-time—or even a full-time—job after retirement.

Unfortunately, many investors have no idea of how much they pay for financial advice. Now, due to new disclosure requirements, known as CRM2 as the latest iteration of the Client Relationship Model, Canadians will be confronted with the cost on their brokerage statements. Expressed clearly in dollars, it’ll come as a shock to many.

To be clear, good advice can be worth paying for and investors who are just starting out should always consult an advisor. But the prices vary and the value can decrease for experienced investors.

When thinking about fees, it’s useful to break the advice business down into two parts. Front-line advisors provide individualized asset allocation, retirement planning, tax planning and similar services. They also typically recommend a portfolio of funds. The second layer of advice comes from the fund companies, which hire portfolio managers to actually pick stocks and bonds. It’s common for both services to be bundled together with the combined annual cost ranging between 2.0% and 2.5% of assets under management.

While a 2.0% to 2.5% annual fee on assets doesn’t sound like much, it’s quite large in comparison to conservative estimates of what the market is likely to return over the next decade, which is about 4% annually on a balanced portfolio.

It’s also useful to convert percentage fees into dollars terms. The accompanying table does just that based on different portfolio sizes and percentage fees. You’ll notice that a small 2.5% fee on a million-dollar portfolio cost a whopping $25,000 a year.

financial adviceTo put that in perspective, the minimum wage in Ontario will climb to $11.40 per hour this year. Sturdy retirees who are willing to work 40 hours a week for 52 weeks a year for minimum wage will make $23,713 before taxes. Alternatively, if they can slash their investment-related expenses, they might be able to save more than they’d earn, after tax.

The good news is there are several ways to cut fees, some without cutting out an advisor. Broadly speaking there are three ways to do it. You can keep the individualized advice but move to a portfolio of low-fee funds. Or you can opt to do your own planning and choose a low-fee portfolio of professionally managed funds. Finally, those with sufficient knowledge and experience can do it on their own and cut costs to the bone.

Let’s take it a step at a time

Many advisors are happy to charge about 1.0% annually on assets under management for their services. A few are pleased to steer clients to portfolios of simple, low-fee index funds. In such cases, the cost for the bundle might fall to about 1.25% annually. That’s half the cost of a 2.5% annual fee and it slashes the fee on a million-dollar portfolio from $25,000 to $12,500. While $12,500 is still a good deal of money, the advice might be worth it, simply to ensure you are not making a big financial mistake. It also comes with the sort of personalized service, planning and hand holding during hard times that some investors sorely need.

Or you can work with fund companies directly for portfolio advice, and invest in their funds. Steadyhand Investment Funds and others provide this sort of service. Their advisors develop customized portfolios with an all-in cost of roughly 1%, a savings of about $15,000 a year on the 2.5% option.

The ultimate cost saver—for those with the experience and knowledge—is to do it yourself. Those who opt for a simple low-cost portfolio of exchange-traded funds like the MoneySense Global Couch Potato portfolio can slash costs to about 0.25%, or lower. That saves an investor about $22,500 a year, based on the same scenario, which is the equivalent of a full-time minimum-wage job. Pick the path that is right for you. For my part, I’d rather cut the fees.


7 comments on “The true price of financial advice

  1. Great piece, Norm, highlights key issues and provides a good direction for those looking to escape the high fees. Question is whether disclosure will be enough to sway enough investors and drive real change. Thanks.


  2. Costs are very important when considering financial advice and investment products. Bad advice is expensive and good advice is priceless.

    I think a 2.5% cost for a million dollar portfolio isn’t realistic, at least not if you’re working with an ethical advisor. The 2.5% cost sounds like you’re quoting a Class A MER for an equity fund. A million dollar portfolio shouldn’t be in a Class A fund. That would be like buying twenty cars at once and paying the retail cost for each. That wouldn’t happen, you would expect a discount. The same goes for investment costs.

    When discussing The True Price of Financial Advice, can we please see a true example?


  3. Great article. I am glad that information on fees to manage accounts are coming to the surface; Especially since so many blindly give to 401k plans and the like without considering the price of so called management


  4. Great article Norm – fees are so important when you consider the growth of an investment portfolio. Another option that you didn’t mention was to work with a Money Coach / CFP(R) who can run retirement projections, educate clients on what is in their best interest and add confidence to the investment strategy. All for a flat fee of less than $1,500 (and $300 per year thereafter). Call it an investment in the knowledge base, but with a 98% satisfaction rating, I know my clients have received multiples of the fee in savings and financial benefit. The confidence comes from knowing I don’t sell any financial products at all. A flat-fee CFP(R) professional is a great alternative for those who want to keep their fees low and benefit from an unbiased perspective.


    • Couldn’t agree more with Trevor’s comments on two fronts; 1) As usual, Norm has written an insightful and informative article; 2) Realizing most people are almost deliberately “investment-blind”, they pay for advice. The problem is most also pay recurring fees and often these fees are not warranted, especially when set against performance. I’ve recommended to family and friends who want to get a handle on their investments but don’t want to invest the time and effort, to hire a flat-fee based professional advisor who does not sell financial products. The up front cost and minimal annual charges (if one stays with said advisor) are inconsequential compared to what people are paying for full advisors and in MERs.


  5. I think fees should be performance based, the investment industry is one in witch an advisor still gets paid if they are not doing such a good job. Well you may say it is not the investment community’s fault if there is a market crash but according to Allan Greenspan the former US Federal Reserve Chairman when interviewed after the crash in 2008 and asked how much money did he loose he replied that he had lost nothing because anyone in the investment field that was monitoring the markets properly should of seen the signs. I know my ex-advisor was either on one of her exotic vacations or shopping for a new Mercedes. Most financial advisors are intelligent people. Regulating them will not control them as they will devise ways to circumvent the regulations but I feel because they are money motivated compensation based on performance will be a win win.


  6. Looks like MoneySense has run out of topics.
    Lets rehash this topic for the 10th or is it 12th time


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