Canadian investors are becoming increasingly aware of fees, and that has retirement experts warning that the drive to pay less could cut too deeply for those who need advice the most.
New disclosure rules, known as CRM2, require adviser fees to be expressed in dollar amounts, as well as percentages.
Seeing how much they pay in dollars could come as a shock to cost-conscious investors already flocking to do-it-yourself exchange traded funds (ETFs), discount brokerages and robo-advisers.
But experts say investors looking to cut costs during or near retirement could be forgoing valuable guidance at a critical time in life.
Peter Bowen, vice-president of tax and retirement research at Fidelity Investments Canada, says older investors need to confront their advisers on the fees they charge before cutting the cord.
"The fee discussion shouldn't just be about how low can we go, but are we getting good value for the fees?" he says. "You can go to a robo-adviser and have very low fees, but if you end up making mistakes that impact your savings or tax position – either now or down the road – you can wipe out a whole lot more value than the fees you've saved."
Fidelity does not set adviser fees. It provides investment products and advice to advisers. That advice focuses on risks for investors in or nearing retirement – the type of issues Mr. Bowen says are best addressed through human contact.
Those discussions can be uncomfortable. Topics include what sort of lifestyle clients want to maintain in retirement, health-care needs, life expectancy, what happens when one spouse outlives the other, and how assets will be passed along to the next generation.
"Every person is unique and their own circumstances need to be considered," Mr. Bowen says.
Having such personal information allows advisers to allocate assets in an investment portfolio, consider after-inflation returns and establish withdrawal rates.
It can also allow effective tax and estate planning, such as allocating assets between registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs). "We are seeing instances where people pass away with RRSPs of $300,000 and $400,000. That all gets triggered at death and can put them into a very high tax bracket," he says, leaving less money for the estate.
That's not to say higher fees always result in more personalized service.
The annual fee on a typical portfolio of mutual funds, for example, is about 2.5 per cent. For younger investors with $100,000 in assets, that's $2,500 a year. But an older investor with $1-million will pay $25,000 – with the bulk of it going to a mutual fund company with no firsthand knowledge of the client.
Older investors with larger portfolios should expect personalized portfolio management and lower fees, says Lorne Zeiler, portfolio manager and wealth adviser with TriDelta Financial in Toronto.
"As you get older, your assets are larger. Therefore, fees on a percentage basis are going to be higher, so it has a larger total value impact," he says.
TriDelta, like many full-service investment-management and financial advisories, has a tiered fee structure. It charges 1.69 per cent on assets of more than $500,000; the fee falls to 0.75 per cent for the largest portfolios.
The annual fee includes services beyond portfolio management. "We do a lot of work on financial planning, legacy planning, tax strategies, withdrawal strategies and we include that all within our fee," Mr. Zeiler says.
The dollar value of personalized financial advice is hard to measure because it comes in many forms over long periods of time, he says, and includes risk management strategies to ensure clients hold on to what they have when markets decline.
One strategy seeks to generate regular income for retirees. That's not easy considering interest rates are at rock-bottom levels, but Mr. Zeiler says a plan that includes dividend stocks and corporate bonds with laddered maturities can make a big difference.
"Eking out an extra 0.25 per cent or 1 per cent is significant in retirement," he says.
Savings from a good tax strategy can cover or exceed investment fees. "We find tens of thousands of dollars in tax savings just from doing small things," he says.
As an example, many seniors run the risk of having Old Age Security (OAS) benefits clawed back if their income is too high after they are forced to make minimum withdrawals through registered retirement income funds (RRIFs) starting at age 71. Mr. Zeiler suggests they convert to a RRIF earlier in life and put the income flowing from it in a TFSA.
"From a tax perspective, maybe you don't need it when you're 65, but it might be more beneficial to start withdrawing it earlier," he says.
Another tax strategy involves lowering a retired couple's overall tax bill by splitting income between a spouse in a high tax bracket and a spouse in a lower one.
Mr. Zeiler says one of the biggest oversights for retired couples is not making provisions for when one spouse dies. In a traditional relationship it is often the husband who deals with the finances, and statistically, men die first.
"Maybe one spouse liked to do it and they pass away," he says. "Then the other is left wondering what to do."