The best approach to lowering fees is to examine all your costs, see if they provide value and then, where appropriate, look for cheaper alternatives.
The brain trust for financial planning standards in Canada thinks a 50-50 balanced portfolio of stocks and bonds will make an average 4.7 per cent annually over the long term.
Every cent you pay in fees undermines that underwhelming return. If this doesn’t get people engaged with the cost of investing, what will?
The return estimates come from the 2023 Projection Assumption Guidelines published by the FP Canada Standards Council and the Institut québécois de planification financière. These guidelines are meant to provide prudent numbers for financial planners to use in their work for clients. The numbers are meant to reflect long-term results, not what you should expect for this year or next.
The 2023 guidelines are as follows:
-Short-term money, aka cash: 2.3 per cent
-Bonds: 3.2 per cent
-Canadian stocks: 6.2 per cent
-Foreign developed market stocks: 6.5 per cent
-Emerging market stocks: 7.4 per cent
The guidelines also include assumptions for a relatively conservative portfolio with 5 per cent in the short-term bucket, 45 per cent in bonds, 40 per cent in Canadian stocks and 10 per cent in foreign developed stocks. The total gross projected return for this portfolio would be 4.7 per cent, which falls to 3.4 per cent after fees pegged at 1.3 per cent.
One way to increase the potential returns of this portfolio would be to add exposure to Canadian, foreign and emerging market stocks. But asset allocation tweaks will only take you so far, especially if you have limited tolerance for stock market volatility.
This brings us to fees. The 1.3 per cent fee used in the financial planning guidelines reflects what an investment adviser or planner would charge plus the cost of owning low-cost exchange-traded funds. All-in fees for advisers using mutual funds would be higher - maybe 2 per cent or more in some cases.
DIY investing seems an obvious answer for lowering fees, but it’s not for everyone. And, there’s the reality that advice has value in providing a financial planning overlay for investing, coaching people through the emotional traps of investing and choosing investments.
The best approach to lowering fees is to examine all your costs, see if they provide value and then, where appropriate, look for cheaper alternatives. For example, mutual fund investors should compare their results with those of low-fee ETFs. This is easy to do - just look at the online product profiles that all mutual fund and ETF companies offer.
Not all ETFs are cheap, by the way. Funds that track broad, well-known stock and bond indexes have management expense ratios as low as 0.06 per cent, or thereabouts. ETFs that use more complex or niche strategies can be in the 0.5 and up range - are they demonstrably better than cheaper funds?
As for the cost of using an adviser or planner, you need to consider the fee on one hand and the services provided on the other. Your fee can be described as well-earned if you have a financial plan in place, helpful ongoing management of your portfolio and confidence that you’re making progress in reaching your goals.
-- Rob Carrick, personal finance columnist
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The Rundown
Two ways yield-hungry investors can benefit from the surge in gold
Gold has been on a roll for the past several months despite rising interest rates, which normally are a headwind for the precious metal. But most income-oriented investors aren’t participating in the gold surge. That’s because gold doesn’t pay interest or dividends. But financial engineers have devised a way to have your gold and live off it too. They’ve launched exchange-traded funds that invest in gold miners and generate income by selling covered call options against some or all of the portfolio. Investors who hold these ETFs are currently receiving attractive yields as well as capital gains. Gordon Pape takes a look at two of them.
Energy stocks are down this year. But the bullish case is very much alive
Strong demand for oil amid limited production was supposed to keep crude prices elevated, rewarding investors with soaring share prices and gushing dividends. Crude oil isn’t playing along, though. The price of West Texas Intermediate briefly dipped below US$70 a barrel this week, bringing the total decline to more than 40 per cent over the past 11 months. The decline is weighing on Canadian energy stocks, which are down 7 per cent this year. But, as David Berman tell us, the bullish case for owning energy stocks is still persuasive.
Investors criticize popular sustainability-linked bonds as investors warn of false environmental claims
Sustainability-linked bonds are rapidly becoming unsustainable. The bonds have only been around since 2019, but investors are already beginning to sour on a product once heralded as the first green financial instrument with teeth. As Jameson Berkow reports, the substantial discretion granted to issuers when setting their environmental, social and governance (ESG) on these products have made sustainability-linked bonds ripe for abuse.
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Ask Globe Investor
Question: I hold units of Brookfield Infrastructure Partners LP (BIP-UN-T) in my tax-free savings account. My accountant informed me that there are no taxes in a TFSA. However, my discount broker, BMO InvestorLine, has been deducting foreign withholding tax from my quarterly BIP.UN distributions. What is going on here?
Answer: As you’ve discovered, tax-free savings accounts aren’t always tax free.
BIP.UN is a Bermuda-based limited partnership that derives its income from holding companies in Canada, the United States and Bermuda. While payments from its operations in Canada and Bermuda are not subject to withholding tax, “payments from holding companies in the U.S. to a Canadian resident … may be subject to withholding taxes,” the partnership explains on its website.
You can generally avoid U.S. withholding tax by holding your BIP.UN units in a registered retirement savings plan or other registered retirement accounts, which are exempt from U.S. withholding tax under the Canada-U.S. tax treaty. However, the exemption does not apply to TFSAs, non-registered accounts, registered education savings plans or other accounts that are not specifically for retirement purposes. The same rules apply to dividends from U.S. companies, which face a 15-per-cent withholding tax unless the shares are held in a retirement account.
In the case of BIP.UN, the good news is that the amounts withheld, if any, are typically much smaller. There was no withholding tax on BIP.UN’s March 31 distribution, for example, and the amount withheld from the Dec. 30 payment was just one cent per unit. In other quarters, withholding tax has been slightly higher or lower. The reason the amounts are tiny is that withholding taxes typically apply only to a portion of BIP.UN’s distribution, not the full amount.
If you can’t stand the idea of paying even a penny of withholding tax, you could move your BIP.UN units to your RRSP. Or, you could swap them for shares of sister company Brookfield Infrastructure Corp. (BIPC), whose dividends are not subject to U.S. withholding tax. (BIPC’s dividend and BIP.UN’s distribution have the same dollar value, but the former qualifies for the Canadian dividend tax credit in a non-registered account.) However, because BIPC trades at a higher price than BIP.UN, and therefore has a lower yield, your investment income will take a hit if you purchase an equivalent dollar amount of BIPC.
I’m not sure it’s worth it to save a small amount of withholding tax every year. If you like BIP.UN as an investment, holding it in a TFSA isn’t a big deal.
--John Heinzl (E-mail your questions to jheinzl@globeandmail.com)
What’s up in the days ahead
Gordon Pape takes a look at mid-size TSX energy stocks that are continuing to pull their weight even with the recent drop in oil prices.
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Compiled by Globe Investor Staff
Rob Carrick