There has been an ongoing debate about investment fees in Canada, and new regulations have recently been implemented to help to increase transparency with the way investor's fees are charged and implemented. The regulators know that many investors are being charged high amounts for basic services, and financial institutions have not historically been required to identify how much they are charging for offering these nominal services. With this in mind, new legislation known as CRM2 aims to help bring clarity to the use of fees, as well as introduce options on how to decrease them. Still, these attempts don't fully educate investors on what all of their investment options truly are, and while identifying fees is now mandatory, it doesn't do enough to explain how the fees actually work. Let me explain:
Since the legislation fully came into affect, few Canadians have truly become aware of CRM2's existence, and what it means. CRM2 stands for Client Relationship Model Phase 2. This was brought in to help transparency with Mutual Fund fees in Canada. The idea behind this legislation is that now, financial institutions are legally required to fully disclose the full amount that they charge investors to use their services (I.e. Specific dollar amounts.) The average mutual fund posted MER is roughly 2.5%. This means annually the manager of the fund makes $2500 of revenue for an account of $100,000. One thing to note is that these fees don’t included any potential trades the advisor or manager makes.
Unfortunately, Mutual Fund fees outside of a registered account (Cash, corporate investments) aren’t tax deductible. CRM2 is supposed to help clients understand the fees they pay and how much, but does CRM2 help understand the value? If your advisor never meets with you to review your portfolio on a minimum annual basis, are you receiving the value? Warren Buffet famously said, “Price is what you pay for, value is what you get”. This is extremely true when it comes to fees that are attributed to an investment account. With this in mind, what is the value in paying a portfolio management fee when no one is actively managing your funds? If the portfolio manager isn’t actively managing the portfolio, are you receiving the value you are paying for? Those fees that are paid annually give incentive to the advisor for servicing the client and are paid to the manager to look after the client’s best interests. Unfortunately, this is often not the case. In addition to this, many mutual funds fees are set up as what is called Deferred Sales Charge. This is where larger commissions are paid to the advisor upfront. In doing so, investors are often locked in for 6-8 years with penalties and other fees should they decide to move or change their investments.
So what options do you have when it comes to investments and how fees are paid?
Option 1: Exchange Traded Funds.
Exchange traded funds are an excellent way to invest directly into the market. These funds do what the market does, usually at a lower fee structure. Major downside of this is all your investments are directly correlated and linked to the market. An ETF would be crushed in any market downtown, no matter what fee would be.
Options 2: Robo-Advisors.
A Growing trend, especially among Millennials, Robo Advisors use an algorithm to determine what investments are suitable for the client based on an initial questionnaire. How active these algorithms are can really affect the outcome of the returns for client.
Option 3: “Do It Yourself” Brokerage Houses.
If you have watched any tv over the past few months, you may have stumbled across an advertisement that shows a family sitting with their advisor, questioning that advisor on how come their fees are so high but their investments haven’t been performing. It’s a great question to ask and once again leads to what is the value you are paying for. Unfortunately, where the “Do it Yourself” brokerage houses drop the ball is in their value. The fees are significantly lower than mutual funds or other managed assets, but does the average Canadian who has a full time job, a family, hobbies, etc., have time to understand the markets to buy and sell at the right time?
If you are knowledgeable in investments and have some play money, I encourage you to try this avenue. If you don’t have that expertise, I would highly recommend using someone that does. You wouldn't attempt to perform an appendectomy on yourself just because you could. Some things are just better not DIY'd.
Option 4: Active Portfolio Manager.
An option most Canadian’s don’t realize they have access to, Portfolio Managers have often found that the average Canadian investor is underserviced in regards to their investments. While historically reserved for the wealthy, Portfolio Managers can offer minimum account acceptance for as low as 50k a household, managed at a fully transparent and all-in fees of as little as 2.4%, and depending on account size, as low as under 1% service fees. This means no surprises on fees and statements, and actually show the dollar amount paid. Non-registered and corporate accounts fees are tax deductible.
One of the main benefits of using a Portfolio Manager is that the funds are fully liquid and accessible to the client whenever the funds are needed. Furthermore, the funds are invested in keeping with the client's current risk tolerance, and is reviewed on a yearly basis and changed accordingly. An Active Portfolio Manager has a range on how assets can be invested to protect investors in down markets and take advantage of growing markets. These fees may be higher than Exchange Traded Funds, Robo Advisors, or “Do it Yourself” trading accounts, but they provide the best value.
As you can see, there are many options to consider when looking at fees when considering actual cost vs. value. Take the time to educate yourself on these options. If your current advisor isn’t discussing the fee structure with you on your investment, it might be the right time to ask the question.
If you haven’t heard from your advisor in a long time, or looking at making a change, reach out to myself for a review of your current investments and fees, or for more detailed information of options available to you. I can be reached at 780 966 5084 or cboyle@legacyfg.ca
For more information about myself, my business, or other financial topics, please visit www.christopherboyle.net