Don’t worry, I won’t make this as awkward as when your parents sat you down to tell you about the birds and the bees.
However, talking about investment fees is still an awkward conversation only because I find there is so much MISINFORMATION on the topic and I want to really outline the fees and the values that go with them when it comes to investing.
You have questions regarding investing and specifically fees.
And this is an important question to get answers to – for you, for me, for everyone.
My goal with this article is to lay down the facts about investment fees.
The first part of this is to determine the 5 ways you can invest.
There are only 5 ways to get to invest in companies in either a debt instrument (such as bonds or debentures) or as ownership (equity or stocks).
A reminder that all investing is truly putting up capital for other people’s ideas – in its simplest form.
And so how do we do that?
Here are THE 5 WAYS TO HOLD INVESTMENTS:
- Invest nowhere, do nothing, invest under your mattress
- Invest at your corner bank (big large institution) and provide them more capital to help them create more profits
- Invest through your employer (typically mandatory) with your pension, group RRSPs, etc.
- Invest through a self-directed account (fully DIY) or putting capital directly into a company or individual idea (private equity, crowdfunding, angel investing, helping your friend/family out)
- Invest with a financial planner and work with a professional investment advisor or PM.
There are different benefits to each AND most people will have one or all of these types of investment accounts.
None of these are the right way and none of these are the wrong way to invest.
However, you need to understand why some types of investing cost more than others.
DIY is typically the lowest cost, but you are all on your own. Typically the risk is higher as you are putting up capital for investments as a sole person or entity which doesn’t carry with it as much strength as a group of people investing larger amounts of capital into a project, idea or company, unless you are investing in an index fund, such as an ETF (Exchange Traded Fund).
Obviously, you know there are no guarantees with any of the types of investing and even the mattress option carries with it risk, such as your house burning down or the value of your money being eroded away from inflation.
So, we can’t look at risk when we deal with fees and we must take risk out of the equation, due to the fact that we must all agree on the point that everything in life carries risk and the only guarantee is taxes and death. How exciting?!
Well, now we need to establish what our intentions are with investing.
This is KEY when discussing fees as your goals may or may not align with the fee structure of various types of investments.
The level of service that comes with each of these 5 types of investment set-ups is extremely varied.
Clearly no one at the mattress store is going to help you hide money under your mattress, whereas sitting with a Certified Financial Planner is literally looking at your financial accounts and investments from every angle, including tax and estate implications.
Your employer’s group pension plan also cares about as much as the mattress sales person, and of course DIY, is well… DIY, so unless you are the professional well versed in the tax code, investments, estate planning, research, etc, then you are literally on your own.
I have clients ask this exact question on fees: why are they so high?
Well, I would have to say, they are high, but what people tend to forget is that if those fees weren’t there then you’d be all on your own (back to Investment option: DIY) or paying for advice (back to the $250 per hour invoice) plus leaving you to still do-it-yourself.
I know at our firm, most clients get away with a steal of a deal, because they are only paying the MER fee on their investments and receiving all the same value as the clients who are choosing fee-for-service and I’m invoicing them at $250/hour (some institutions charge much more than that).
So, if you calculate your fees, for most accounts under $500,000, you are actually getting a pretty good deal not having to pay the fee-for-service rack rate. (Oh, and as account value rises when you are invested in pooled-mutual-fund type securities, typically investment fees reduce – so your $1,000,000 portfolio will pay less percentage wise in fees than the average client with under $100,000 in assets.)
What is included in the MER or investment fees?
In a nutshell, a Management Expense Ration (MER) represents the combined total of the funds management fee, operating expenses, and taxes. (Oh ya, there are taxes upon taxes…)
Here’s a pretty detailed list that’s worth a review and these are all at a fraction of the cost that it would cost you to do it yourself:
- Professional Investment Management & Investment Selection
- Investment Diversification
- Research (Have you done research before?! How many hours did it take you to study one company? This is why they have teams doing it.)
- Easy Access to your money when you need it! LIQUIDITY! (Don’t underestimate this one – not every asset is liquid in nature!)
- Convenience
- Administration of Account Opening/Closings
- Reporting, Statements & Fund Communication
- Regulatory Compliance and CRA Audits
- Accounting and Fund Valuations Costs
- Custody Fees (the clearing house)
- Legal Fees (Yes, Lawyers are everywhere)
- Cost of Creating and Distributing Annual, Semi-Annual Reports and Prospectuses
- PDF, Printing Costs & Mailing Fees (If you still get your statements mailed to your house or like a shiny brochure, even if it is a PDF)
- Online Platform Technology Fees (How did you login to your account?)
- Regulatory and Continuing Education Credentials (stay top of game)
- Call Centre Support/Customer Service (For when things go wrong)
- Advisors (A human to talk to regarding your specific account)
- Taxes (How could we forget you?)
So yes, this can cost you in the range of 2% to 3.5%.
Total Realtor fees are in the same range as mutual funds (note: the average home price of $500,000 pays 3.8% in fees to sell your home plus lawyers fees, etc.) Most businesses provide services and have a profit margin of over 5-10%, yet you still buy the groceries and services that you require to function.
Investing & Investment fees are no different.
Not to mention, you are willing to hire a gym, fitness class or fitness coach to help you stay fit. Hiring a financial professional is no different.
Typically, the brokerages take 1% of that fee and then it gets cut up even further.
Your advisors role is to:
- understand your financial goals & needs for this account
- compliance and regulatory checks to make sure this account is suitable
- monitors transactions on your behalf
- complete 30+ hours of professional development, education and licence renewal every year
- tax planning considerations for the account
- estate planning considerations for the account
- communications & updates regarding your account
I believe most people will see the value in this.
Now, the next question, what happens when my fees eat up most of my return?
That will happen from time to time as the market goes through its cycles. It’s the cost of doing business and in this case, the cost of investing – there are no guarantees. However, ALL of my long term clients have made money, over and above the fees, sure it varies, but that also depended on your personal risk tolerance and what you invested in.
It’s really important to note the difference in fees in regards to different investments.
Here are a few things to note:
- Foreign Equity (Stock) Trading has higher fees than local trading or ETF (index type funds)
- Active Management versus Passive Management: my opinion is that you still need both and there are macro trends you need to be aware of
- Don’t forget about currency exchange when investing in different countries and how that effects your portfolio
- Bonds and Debt Instruments cost less than equity trading
- Fixed Income fees are usually embedded in the bond
- What about the TER (Trading Expense Ratio?) Nobody really talks about that. That is the measure of a funds trading costs and usually expressed as a percentage
- There are sales charges, however, our firm typically doesn’t charge upfront commissions, such as DSC (Deferred Sales Charge) funds. Our firm does No-Load or Front End Load at 0% – so there are no fees to you when you redeem your investment
- Segregated Funds also have additional guarantees, such as Assuris for accounts up to $100,000 and have death benefit guarantees in place, even if minimal and this is included in the fee
- Segregated Funds also by-pass probate in an estate and do offer creditor protection in certain cases
My goal here is to outline to you the value of what you are paying for.
Many investors are going the DIY route. That is great if that’s been working for you.
It is important to note that at some point in time, you will need a professional or you will need to hire a professional to help you navigate tax, estate matters, total holistic financial planning at some point, and those that choose the DIY method will have to pay for that service.
Here’s another point to note:
Clients who pay for the professional management and help along the way typically have 3.9 times more wealth or 290% greater net worth because of working with a professional financial planner than those who go it along. {Source: Center for Interuniversity Research and Analysis of Organizations, 15-year Gamma Factor Report & Value of Financial Advice Study on Canadians who work with a Certified Financial Planner and those that don’t}
No one builds wealth alone.
And, the old adage plays true here.
It takes a team. It takes a village. Like raising kids!
Fees are ever only an issue in the absence of value.
Are you getting the service you desire? Are you getting your questions answered in a timely manner? Does your advisor care? Do you feel you are getting value?
I personally will pay a premium to know I’m getting great service. I will also pay a premium for great advice.
Here’s another question: Do you know what you are paying in fees in regards to your investments?
If you don’t have anyone to explain that to you, then maybe it’s time you hire an advisor. If you have an advisor that can’t or won’t explain it to you in detail, then maybe it’s time you hire a new advisor.
Oh, and how great is it to be able to phone/email one person instead of a call centre and wait on hold for an hour?!
Sometimes in life there are things worth paying for.
Financial Planning, Retirement Planning, Tax Planning, Risk Management and Estate Planning is definitely worth paying for.
~ Written by Lisa Elle, BMgmt, CFP, FCSI, CHS, CPCA, EPC, CEA, CCS, RIS
PS. Want to get started working with Ellements Financial Group? Go to ellementsgroup.com/getstarted
