Until recently, Canadians more or less shrugged when it came to financial fees. But shaky stock markets and razor-thin returns for fixed-income investments have resulted in something of an attitude adjustment. Investment costs, whether explicit or embedded, are fast becoming enemy No. 1 for Canadian investors.
“Between 1982 and 2000, the average return on the S&P 500 was 12 per cent a year, so if you were paying 2 or 3 per cent in fees, who cares, if you are netting 10 per cent?” said Douglas Nelson, a partner and portfolio risk manager with Nelson Financial Consultants and author of Master Your Retirement: How to Fulfill Your Dreams With Peace of Mind.
“Today, if you are happy to get hopefully a 3- to 5-per-cent gross return and you take away 2 to 3 per cent for fees, than you haven’t got a lot left over.”
Mr. Nelson advises investors to take a long, hard look at fees and consider ways to reduce them. His firm contends that people paying 2.5 per cent annually in fees can reduce that figure by one-third.
The Winnipeg-based adviser has identified a few simple ways Canadians can reduce fees:
- Go with lower-fee investments, such as exchange traded funds, and individual stocks and bonds.
- Stay away from higher priced mutual funds, segregated funds and guaranteed minimum withdrawal benefit plans.
- Eliminate the middle man and work directly with a portfolio manager, who typically buys individual securities and avoids fee-heavy funds.
- Find a fee-only financial adviser, rather than one who works on a percentage of assets, which will allow investors to know what they pay for.
Many investors may be tempted to take a do-it-yourself approach to investing as a way to keep costs to a minimum. It’s a solution that’s not right for everyone, warns one adviser.
“Doing it yourself, buying ETFs, is the low-cost way to manage money,” said Ted Rechtshaffen, president of TriDelta Financial Partners in Toronto. “It is a question of time and value.”
He adds a caveat. Investors need to ask themselves whether the go-it-alone approach is something they enjoy doing, have time for, have some basic ability for, and finally, will put them financially ahead.
Just how big a drag investment costs prove to be depends on the size of the portfolio and how it is held, Mr. Rechtshaffen noted. At the high end are investors with an RRSP portfolio that is managed by a “tied” adviser who sells mutual funds only. They may be paying 3 per cent and they cannot deduct any of those fees.
He compares that to an investor with a portfolio worth $1-million split evenly between registered and non-registered accounts. This person is still working and in the top tax bracket. “They might pay a fee of, let’s say, one and a quarter per cent. They can write off 46 per cent of the fee for the non-registered [investments]. They are paying, after tax, 70 basis points.
“So you can get professional investment management in many cases through an investment manager for less than 1 per cent after tax,” he concluded.
Mr. Rechtshaffen’s advice varies with the amount invested. “If you have $250,000-plus in investment assets and it is all in mutual funds through an adviser, you are probably paying too much. If you have $75,000, maybe not so much, because sometimes you are getting other value and information” from the financial adviser selling you those funds.
Some may be tempted to ditch their adviser and set up a retirement account with a discount brokerage. That approach makes sense only when people avoid buying high-cost mutual funds and stick with low-fee funds and individual securities. And again, that approach comes down to whether people have the time, inclination and aptitude to manage their own portfolios.
Regardless of whether Canadians want to go it alone or work with an adviser, they should pay far more attention to their investments and retirement planning, beyond the fees they pay.
“I think people should be more involved in their financial affairs than they have been in the past,” Mr. Nelson said. “It’s your money, it’s your livelihood and your future.
“So turning a blind eye and just investing money in the market or with any adviser and hoping it works out in the end, I’m not sure that is a prudent strategy.”
Clip those fees
These strategies can reduce investment costs, says Sterling Rempel, a Calgary-based certified financial planner.
Go with the group: An employee who is part of a group retirement savings plan often has a lower management fee,” Mr. Rempel said. “So if they have some smaller accounts scattered around at the banks, perhaps they would want to consolidate those into a group plan.”
Aggregate: Many financial institutions have lower fee structures, say at $250,000 or $500,000, for investment accounts. Consolidation of individual and even family accounts may push you into a lower fee bracket.
Set up a fee-based account: “You can work with your adviser to set up an acceptable fee structure.”
Look to ETFs: Generally a good idea, though they have inherent risks as well, Mr. Rempel said of the go-it-alone ETF approach. “They can go up and down, whereas an active manager could be trading to generate returns.”
Go white label: Some dealers have their own versions of a fund, let’s say Templeton Growth. Check whether the dealer version of that fund has a higher management expense ratio (MER) than the direct version of it.
Consider segregated funds: Yes, seg funds typically have higher fees than mutual funds, but because they are a form of life insurance, they boast some nifty attributes. They allow a holder to name a beneficiary directly, “thereby bypassing probate [fees] and any potential creditors to their estate. So there are some good reasons why you might pay higher fees.”