The level of fee awareness among Canadian investors improved modestly in the past few years – from very bad to just plain bad.
Several years ago, investors started receiving annual statements tallying the fees they paid for investment advice and the cost of buying/selling various types of financial products. To measure the impact of this improved fee disclosure, securities regulators sponsored a multiyear study involving 2,000 or so investors.
The results are dismal enough to demand that this edition of the Portfolio Strategy column be devoted to explaining the fees paid by both advised and do-it-yourself investors, and providing rough guidelines on reasonable fee levels. Underlying this exercise is a basic rule of investing: Every dollar you pay in fees is a buck off your investment gains.
Too many investors are blind to fees
A multi-year survey sponsored by the Canadian
Securities Administrators looks at how awareness
of fees has changed in the years following the
introduction of improved disclosure by the invest-
ment industry. Here are some highlights:
Percentage of respondents who answered Yes
to the following:
Question: Do you pay any fees for the operation,
management and/or administration of your
account?
Baseline
43%
46 %
2017
2018
49%
51%
2019
Percentage of respondents who answered Yes:
Question: Do the fees that are associated with
your account or investments have an impact
on the return on your investments?
Baseline
41%
2017
48%
2018
51%
51%
2019
Note: Baseline=2016
JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE:
rob carrick; Canadian Securities Adminis-
trators/Innovative Research Group
Too many investors are blind to fees
A multi-year survey sponsored by the Canadian Securities
Administrators looks at how awareness of fees has
changed in the years following the introduction of
improved disclosure by the investment industry.
Here are some highlights:
Percentage of respondents who answered Yes
to the following:
Question: Do you pay any fees for the operation,
management and/or administration of your account?
Baseline
43%
46 %
2017
2018
49%
51%
2019
Percentage of respondents who answered Yes:
Question: Do the fees that are associated with your
account or investments have an impact on the return
on your investments?
Baseline
41%
2017
48%
2018
51%
51%
2019
Note: Baseline=2016
JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE: rob carrick;
Canadian Securities Administrators/Innovative
Research Group
Too many investors are blind to fees
A multi-year survey sponsored by the Canadian Securities Administrators looks at how
awareness of fees has changed in the years following the introduction of improved
disclosure by the investment industry. Here are some highlights:
Percentage of respondents who answered Yes to the following:
Question: Do you pay
any fees for the operation,
management and/or
administration of your
account?
Baseline
43%
46 %
2017
2018
49%
51%
2019
Percentage of respondents who answered Yes:
Question: Do the fees that
are associated with your
account or investments
have an impact on the
return on your invest
ments?
Baseline
41%
2017
48%
2018
51%
51%
2019
Note: Baseline=2016
JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE: rob carrick; Canadian Securities
Administrators/Innovative Research Group
The recently published survey results show some improvement in fee awareness in recent years. But they also suggest that very close to half of investors are (a) unaware they pay fees for the operation, management and/or administration of your account and (b) don’t understand that these fees can have an impact on returns (see chart for more details).
These improvements in fee awareness tell us that increased disclosure of investing and advice costs is slowly improving investor literacy and is thus worthwhile. But that near-50-per-cent obliviousness rate on fees is a problem.
Investors jolted awake about fees sometimes react with anger, as if they were victimized by a greedy investment industry. There’s some truth to this – fee disclosure has improved in recent years, but there’s still a pervasive industry attitude that fees should be hidden as much as possible. Investment companies could do better, but so could investors in asking the right questions. Why on earth do people expect to be able to invest for free?
Assessing fees should be at least as much about the value you’re getting as the actual amounts paid. Minimal fees mean zero if you’re a mixed-up DIYer whose account is basically a woodchipper for money. Paying the cost of having an adviser or planner can help make you richer, but only if you have a true advice-provider and aren’t stuck with one of the financial industry’s many product sellers.
Let’s take a look at how some key investment and advice fees affect both advised and DIY investors:
Advice and planning fees
Advised investors
Here are three ways investors pay for investment advice and financial planning:
- Trailing commissions: Buried in the cost of owning mutual funds and paid to advisers and their firms directly by fund companies. Note: Fund returns are reported on an after-fee basis, which means clients get what’s left after the fund company, the adviser and the adviser’s firm have been paid. Equity and balanced funds typically have a trailer of 1 per cent over your investment, while bond funds are 0.5 per cent.
- The fee-based arrangement: A set percentage of your account assets, often in the 1 to 1.75 per cent range and possibly less for seven-figure accounts.
- Fee-for-service: This mainly applies to financial planners who charge a flat or hourly fee to provide planning services and big-picture investing advice (many of these planners are not licensed to discuss specific securities). A one-off consultation might cost a few hundred dollars, while a full financial plan could cost $3,000 to $5,000 or more, depending on the client’s needs.
DIY
There are no obvious advice fees if you manage your own portfolio, but you could conceivably buy a mutual fund with trailing commissions built into its fees. Always look for Series D mutual funds, with the trailer mostly eliminated to reflect the fact that you’re not getting advice.
DIY investors sometimes overlook the benefits of financial planning, which can be purchased through a fee-for-service planner and targeted to specific concerns such as the adequacy of your retirement savings.
Buying and selling securities
Advised investors
Commissions charged by advisers on the purchase and sale of mutual funds are fast-disappearing – resist if an adviser tries to foist them on you. In fee-based accounts, the cost of trades should be included in the regular account fee. A fair number of advisers still work on a commission basis, which means they’re compensated through costs levied to buy and sell securities. The average full-service brokerage commission on a stock trade is $150, according to the online educational website Investopedia. That’s a U.S. number – Canadian costs are scarce because brokerage firms don’t disclose them to the public.
DIY
Online brokerage commissions max out at just under $10 a trade and can be as cheap as $1.99 (at Virtual Brokers) to $4.95 (at Questrade).
Investment products
Advised and DIY
The cost of owning a mutual fund is measured through the management expense ratio (again, fund returns are reported after the MER is applied). The MER covers the afore-mentioned trailing commissions, plus costs associated with running a fund. There’s no cost to owning stocks, other than buy and sell transactions. Exchange-traded funds have an MER just like a mutual fund, but far lower.
If you have an adviser who uses the fast-growing fee-based model, add the account fee to the MER for any funds you own for an overall cost. A client paying a 1.5 per cent advice fee to manage an ETF portfolio with an overall weighted average MER of 0.2 per cent is paying a total of 1.7 per cent in fees.
Finding out the MER of a mutual fund or ETF is easy – just google the fund name and the phrase Fund Facts in the search box. Fund Facts are plain-language disclosure documents that contain information on fees. Prepare for sticker shock when you compare mutual fund and ETF fees – the cheapest ETFs are as low as 0.03 to 0.06 per cent, while mutual funds in the 1.75 to 2 per cent range and more are common.
Miscellaneous
Advised and DIY
Some firms may charge an annual administration fees of $125 or so for registered accounts. Online brokers focus these costs on smaller accounts of $15,000 to $25,000 or less. Account inactivity fees of $25 a quarter may apply to smaller DIY accounts – this applies to accounts that lie dormant.
Fees may also be charged on withdrawals from registered retirement savings plans and registered retirement income funds, although brokers typically don’t charge clients making their mandatory RRIF withdrawals.
A final note for the half of investors who were unclear about paying fees: You are almost certainly incurring costs to invest and receive advice. The investment industry can do a better job of informing you about these fees, and you can also be a more involved client.
Stay informed about your money. We have a newsletter from personal finance columnist Rob Carrick. Sign up today.
Rob Carrick