The costs of financial advice

Special to Financial Post  | Jul 15, 2011

By Jason Heath

Two recent studies provide some shocking insights into financial advice, fees and fiduciary standards.

A Cerulli Associates survey found that about one-third of investors don’t know how their financial advisor gets paid. A second J.D. Power and Associates survey suggests that 85% of investors don’t understand the importance of a fiduciary standard, whereby advisors must disclose conflicts of interest and put clients first.

The Cerulli survey on fees is puzzling. Few consumers would purchase an automobile, a sofa or even a pair of pyjamas without knowing the price. But 33% of investors are oblivious to their advisor’s compensation.

One thing is for sure – it’s not free. A 2007 Harvard study using 2002 data found that Canada’s mutual fund fees were the highest in the world, averaging 2.56% compared with 1.29% for the rest of the world. So someone with a $100,000 RRSP invested in mutual funds is likely paying somewhere in the neighbourhood of $2,500 in annual fees, even though the fees are embedded in and deducted from their mutual fund returns.

Many investors are in fee-based accounts, meaning they pay an annual fee based on a percentage of their investments. Fees typically start at about 2% for average investors and generally only decline to 1% or lower for multi-million dollar portfolios. Some others pay commissions of 1-2% or more every time they buy or sell an investment. read full article