Q: My wife Cathy and I pay our adviser an annual flat fee of 1.25% to manage our retirement portfolio, which is worth about $1 million. But I’m not so sure I’m comfortable with this arrangement anymore. We’re buy-and-hold investors and I’m the one whose always telling our adviser what to do. What are our options for reducing fees and getting better returns? — Ned, Toronto
A: I find most investors are unaware that fees can vary greatly depending on the investment options they choose. In fact, my experience has been that many investors don’t even know how or how much they’re paying.
Just keep in mind that lower fees won’t guarantee higher returns, but they will certainly tilt the scale in your favour. For instance, if you can decrease fees or increase returns by just one percentage point annually, you can generate a one-third larger nest egg in 30 years.
Right now, you and Cathy are forking out $12,500 every year to your adviser. And because you live in Ontario, there’s an additional 13% Harmonized Sales Tax (HST), pushing your total fees to more than$14,000 a year—or 1.4% of your portfolio. (If you own mutual funds, there’s embedded fees to take into account as well.)
I find all of this concerning because you sound like a reasonably well-versed, buy-and-hold stock investor doing the majority of the buy-and-sell research yourself. It seems that your adviser is just an order taker and being paid quite handsomely to do very little.
Leave your question for Jason Heath in the comment section below or email [email protected] and he may answer it in an upcoming column.
If the two of you are going to pay 1.25% each year for portfolio management, I’d much rather see your adviser providing more active management that focuses on unique asset classes, proper diversification and a consistent investment strategy. This will at least give you the chance of outperforming the benchmarks that all too many advisers lag by an amount equal to their fees.
But if you do want to stick with your adviser, you should probably just be paying a transaction fee every time you buy and sell—in which case your fees might be more like 1.25% of the transaction and not the whole portfolio. Assuming a 15% annual portfolio turnover, your annual fees would be reduced to $3,750 plus HST. That represents a savings of about $10,000 or 1% of their portfolio annually—good news for the two of you, but not so much for your adviser.
Another option is for you to manage the portfolio yourself at a discount brokerage. This means you’ll no longer have your adviser to bounce ideas off of, but you could bring your fees down to $4.99 per trade and be paying under $100 a year in fees.
All of this isn’t to say that everyone should managing their own portfolios, but you’re basically a do-it-yourself investor already. Don’t be afraid to move to a discount brokerage and part ways with the perceived comfort of the bank. Someone with a portfolio as large as yours shouldn’t be paying full service investment management fees if they’re not getting the services that should go along with it.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products.