People like to play hardball when they're negotiating to buy a new car or a house. But when it comes to investing costs, they turn into timid little puppies.
That's a big mistake, says Garth Rustand, executive director of the Vancouver-based Investors-Aid Co-operative of Canada.
"The industry has done a good job of making the consumer passive," he says. "The big thing I've found is that many, many costs in the investment industry are negotiable and I think people need to know that because it's not presented that way."
Mr. Rustand ought to know. For nearly 15 years he worked as an investment adviser with a big firm in Vancouver. After becoming disillusioned with the industry, he quit and in 2008 launched Investors-Aid, a member-owned organization that provides education and advice to retail investors.
With registered retirement savings plan season in full swing and advisers eager to bring in new assets, now may be an opportune time to take a hard look at the costs you're paying. After all, the lower your costs are, the better your returns will be in the long run. Here are some ways consumers can cut their investing costs, and tips on how to get the best results.
Instead of buying actively-managed mutual funds that typically charge hefty fees, go with index funds instead. Because they're passive and track a stock benchmark, there's no mutual fund manager pulling down a big salary for his or her supposed stock-picking prowess.
What's more, index funds have been shown time and again to outperform actively-managed funds. The reason: The costs of active management drag down performance. Investors can choose index mutual funds, or save even more by switching to exchange-traded funds or ETFs.
"People think it's very difficult to invest when it's really simple," Mr. Rustand says. "All you have to do is index your portfolio, keep your costs low and be constantly invested and you're okay."
When transferring an account from one firm to another, the financial institution losing the account typically charges a "transfer-out" fee of $125 or $130. But the investor should be able to recoup that cash from the new institution.
"The receiving institution is generally more than happy to rebate those costs to you. It's one of those things you have to ask for and then track to make sure it happens," he says.
RRSP administration fees
Many firms charge an administration fee of $50 or $100 on RRSPs, registered education savings plans and other registered accounts. These fees will usually be waived if your account balance is above a certain amount, but investors who don't meet the minimum should also ask, Mr. Rustand says.
"We're getting to the point where these fees are essentially an anachronism," he says. "All you have to do generally is ask to not pay that and you should be able to get away with it."
If you're working with an adviser who gets paid through trading and mutual fund commissions, ask about switching to an asset-based account. With this compensation model, the fee is based on a percentage of your portfolio's value.
It's important to lay out your expectations. If all you need is someone to hold your hand during volatile periods and rebalance your holdings once or twice a year, you may be able to negotiate a lower fee than if you're expecting your adviser to do a lot of time-consuming work such as financial planning. Generally, the bigger your account, the more leverage you'll have.
According to Mr. Rustand, most firms demand that their advisers charge a minimum fee of $1,200 per account. So, on a $200,000 account, that works out to a fee of 0.6 per cent. However, others say those figures are unrealistically low.
John De Goey, a certified financial planner and investment adviser with Burgeonvest Bick Securities Ltd. in Toronto, says a fee of about 1 per cent or 1.25 per cent of assets is more common. He uses a sliding scale, charging 1.4 per cent on the first $250,000 of assets, and 0.6 per cent for any amounts above that. So, on a $1-million account, his fee works out to $8,000, or 0.8 per cent.
While some advisers may negotiate, most won't, he adds. "I don't negotiate my fees ... these are my fees, either you pay them or you don't," he says.
If you switch to an asset-based account and you own mutual funds, make sure you aren't paying your adviser twice, Mr. Rustand says.
Conventional mutual funds pay the adviser an ongoing "trailer" commission, but if you're already paying a fee based on a percentage of your assets, you should be holding F-class funds instead. These low-fee versions of mutual funds have the adviser compensation stripped out and are designed for asset-based accounts.
Investor Education on mutual funds:
Some firms charge a fee of 1 to 3 per cent to switch mutual funds. They'll also charge a "front-end load" on initial fund purchases. In both cases, these fees are optional and will usually be waived if you ask, Mr. Rustand says.
Going it alone
The cheapest option of all is to manage your own investments. But it's not for everyone.
"You can consider going to a discount brokerage and cutting out the adviser altogether, but I would only advise that for people who have the time, temperament and training, especially the temperament, to do it," Mr. De Goey says. "My personal view is that maybe 20 to 30 per cent of all investors should be do-it-yourselfers."
Whether you go it alone or use an adviser, Mr. Rustand and Mr. De Goey agree that keeping your costs as low as possible will have a big impact on your returns. That's why both favour a passive investing style that doesn't rely on stock-picking.
"I'm very adamant about costs being a really important driver, and the industry does not want to talk about costs because what clients call costs, product manufacturers call profit," Mr. De Goey says.