The article “These are the adviser fees, hidden and otherwise, that investors need to be wary of” was originally published in Financial Post on February 28, 2023. PHOTO BY GETTY IMAGES/ISTOCKPHOTO.
Most consumers are still largely in the dark about how much they pay for investment services
Despite regulatory efforts to increase fee disclosure in Canada, most consumers are still largely in the dark about how much they pay for investment services. A 2020 study by the Canadian Securities Administrators found only half of investors felt they knew how much they paid their adviser in the previous year. However, only one out of five could correctly identify their total fees on their account statement, according to a 2021 report from the Mutual Fund Dealers Association of Canada.
In fairness, few borrowers would know off the top of their heads the interest paid last year on their mortgage. But most would know their interest rate, signed an agreement clearly identifying that rate when borrowing the money and see the annual interest paid listed on their year-end statement.
For those who aren’t sure how much they pay for financial advice — and those who think they do — here’s a breakdown of how fees work in Canada.
The Investment Funds Institute of Canada reports 47 per cent of Canadian investors own mutual funds. They are still the primary investment vehicle in Canada.
Mutual funds have embedded fees deducted from the fund’s returns. The management expense ratio or MER represents the all-in fee for the fund’s management, operating costs and applicable sales tax. It is a percentage that tends to range from 0.5 to three per cent.
The management fees include the fee paid to the mutual fund managers as well as any ongoing fees paid each year to the adviser. For self-directed investors, mutual fund fees are not subject to the incremental adviser trailer fees — at least not anymore. Prior to June 1, 2022, trailer fee mutual funds were permitted to be sold to DIY investors, with some discount brokers quietly pocketing the extra profit.
Some advisers use F-class mutual funds with no ongoing trailer fee paid to them. But the adviser generally charges an incremental management fee equal to a percentage of the account value. So, investors should be aware that the fee they pay to their adviser may not tell the whole story of their investment fees. A common scenario might be a one per cent management fee to the adviser and a one per cent F-class MER fee within the mutual fund, for two per cent combined.
Morningstar’s latest Global Investor Experience Study found the median asset-weighted fee for an equity fund invested in stocks was 1.76 per cent in Canada. Fixed income MERs for bonds were lower at 0.89 per cent. For an allocation fund that combines stocks, bonds and other asset classes, the median fee was 1.90 per cent.
Mutual funds have historically been subject to sales commissions. A sales commission is when a fee is paid to buy or sell a mutual fund, generally ranging up to five per cent. Deferred sales charge fees were banned in Canada in 2022, so new mutual fund purchases cannot include a deferred fee to sell. Mutual funds purchased prior to June 1, 2022 may still have deferred sales charges that expire over time. Segregated funds, which are effectively mutual funds issued by insurance companies, were not subject to this deferred sales charge ban.
Exchange traded funds
ETFs have gained popularity over the past 20 years. In fact, the Canadian ETF Association reports there were 699 Canadian-listed ETFs at the end of 2022 with total assets of $339.6 billion. iShares reported that ETFs made up 12.6 per cent of equity assets in the U.S. as of Q4 2022.
ETF fees generally range from only a couple hundredths of a per cent to about 0.75 per cent. Lower-fee ETF options tend to be simpler products that track a broad index, whereas higher-fee ETFs tend to have active management or a more complex screening method. So, although ETFs are associated with passive investing, more active ETFs are becoming available. Similarly, there are plenty of passive index mutual funds.
While ETFs have generally been embraced by self-directed investors, they have also made their way into adviser portfolios. Many advisers charge a management fee, typically in the one to 1.5 per cent range, and may use a mix of investment products, which may include ETFs.
Investors who are interested in ETFs but not inclined to invest on their own can consider a robo-adviser. These online advisers use technology to their advantage to bring managed ETF solutions to the masses, largely through their web and mobile apps. However, customer service tends to be light, and customization may not be available. In fact, they tend to use model portfolios, although this may be just fine for many investors.
Robo-adviser fees generally range from 0.25 per cent to 0.75 per cent. But keep in mind this is their management fee and the underlying ETFs will have their own incremental fees. As a result, all-in fees may be 0.5 to one per cent. This is cheaper than most full-service advisers, but at the expense of time and access to a dedicated adviser.
Investors can buy stocks for free or close to it these days in a self-directed account. The commission rates generally range from $5 to $10 to buy shares, and some zero-commission options are available.
Largely gone are the days of having a stock broker who would call you up, tell you about a stock, place a trade, and charge a commission. This transactional model is less efficient and profitable for the investment industry, so there has been more of a move to discretionary portfolio management.
With a discretionary portfolio, your adviser does not need to call you up before making a trade. You develop an investment policy statement with parameters around risk, restrictions on investing in certain stocks or sectors, and income needs, amongst other criteria. The portfolio is then managed, much like a private mutual fund, in a manner that is easier to provide to a large number of clients. Fees tend to be in the one to two per cent range, but portfolios into the millions may see lower fees that could be under one per cent.
Advice-only financial planning
Advice-only planners charge fees for financial planning advice but do not provide investment management. The advice tends to focus on retirement planning but can extend to tax and estate planning, investment strategy and financial coaching.
The majority charge a project or annual fee but some also work on an hourly basis. The cost for a financial plan may range from $2,500 to $7,500 for most clients but can be higher for complex cases or depending on mutual expectations of process and deliverables.
Some clients work sporadically with advice-only financial planners, while others work consistently, year in and year out, like with a traditional financial advisory relationship. Fees may be lower in subsequent years due to additional work that may be required up-front.
Fees should not be a black box when you are buying investments or working with a financial adviser. If you are not clear on what you pay, you should ask. Paying a fair fee is probably more important than paying the lowest fee at all costs. But research also shows that paying high investment fees tends to lead to lower net returns.
Jason Heath is a fee-only, advice-only certified financial planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever. He can be reached at firstname.lastname@example.org.