You've been told a thousand times to pay more attention to investing fees.
Now, there's a tool to help you do it. The Globe and Mail's Web development team and I have created an online calculator that asks you to provide the fee you're paying for financial advice, and then shows how you compare to others who have used the tool (tgam.ca/feetool). Want to know if you're paying too much for advice? We can help you find out.
The tool is designed for investors who have fee-based accounts, where they pay a percentage of the value of their account to their adviser and his or her firm, and for people who pay for advice by the hour. Fee-based advice is a fast-growing trend that last year accounted for just over half of fee revenue generated by advisers. Charging by the hour is a small advice niche, but one worth encouraging because it's so transparent and flexible in the way it allows clients to manage costs.
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In a constantly changing investment world, low fees are one of the most dependable ways to position yourself for success. That's why the investing media harangue people to pay attention to their investing costs. My own latest rant came this week – it's a reaction to a mystery shopping exercise by securities regulators in which close to half of advisers didn't discuss fees with potential clients. My conclusion was that people have to be bolder in questioning advisers about how much they charge.
But that guidance is helpful only to a certain extent. Great, you know what your adviser charges. But what do other advisers charge clients who are similar to you? That information is essential in deciding whether your fees are reasonable, but it's near impossible to acquire because the investment industry is so secretive. Our fee tool defeats this secrecy.
The tool looks strictly at the cost of advice, not at the fees associated with owning investments such as exchange-traded funds and mutual funds. Mind you, advice is a vague term as used in the financial industry. Some advisers only build and manage investment portfolios, while others take a broader approach to creating a personalized financial plan to guide your investing.
We differentiate between these two levels of advice in our tool by asking users what services they receive – managing investments, or investments and financial planning. This is important stuff because it speaks to the value clients receive in paying fees. You may discover in using the tool that you're paying slightly higher-than-average fees. That's no cause for concern if you're happy with your returns and confident of reaching your goals because of ongoing financial planning.
If you're paying comparatively high fees for bad service, then our tool may prompt you to find a better adviser. Do-it-yourself investing is also an option, but our tool is based on the idea that advice is useful and worth paying for when well-executed and well-priced.
Two ways of paying for investing advice aren't covered in depth by our calculator. One is the transactional model, where you pay commissions to trade securities. The investment industry consulting firm PriceMetrix says the average commission last year was 0.99 per cent of the cost of the trade.
There's a good reason why we left out another way of paying for advice – through fees investors pay to own mutual funds. In the fund world, it's easy to understand your fees if you put a little work into it. Fund companies all produce short Fund Facts documents that explain in plain language how much a fund costs. Included in this information is the trailing commission, which is paid to advisers and their firms by fund companies out of expenses charged against fund returns (these returns are published on an after-fee basis).
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Trailing commissions compensate advisers for the work they do on your account. The commission for equity and balanced funds is usually 1 per cent of the value of your investment per year, while bond funds are usually at 0.5 per cent. Want to check your own funds? Just type your fund name into the search box on the Investor POS website at ffxpress.investorpos.com/Home/Home.aspx.
Fee-based advice needs particular oversight for a bunch of reasons, the first being that almost all firms decline to post their fees publicly. Comparison shopping is therefore impossible. Another reason is that securities regulators are considering the idea of stopping the practice of embedding compensation to advisers in fund fees. If this happens, and let's hope it does, then fee-based advice will become the norm in the investing business.
Finally, fee-based advice can be comparatively expensive for investors. PriceMetrix says the average fee last year was 1.02 per cent, with accounts of less than $250,000 paying an average 1.44 per cent and those above $2-million averaging 0.75 per cent. A mutual fund portfolio weighted 60 per cent to stocks and 40 per cent to bonds would likely mean trailing commissions of 0.8 per cent.
Fortunately for fee-based clients, advisers using this model often have the freedom to use low-cost ETFs to build portfolios. A column I wrote for Globe Unlimited subscribers not too long ago showed how to build a balanced portfolio with three ETFs that have a weighted average management expense ratio of 0.15 per cent. Add that to the average fee-based account charge of 1.02 per cent and you end up with a total cost of 1.17 per cent.
The all-in cost of investing in mutual funds through an adviser paid via trailing commissions can easily run you 2 to 2.5 per cent, or even more. Fee-based advisers use low-cost F-class mutual funds (they pay no trailers), but even there the all-in cost for investors can be in the range of 2 per cent or more.
The investment industry has been pushed by regulators into doing a good job of disclosing fees on products, but advice fees are still hard to compare. Try our fee tool to find out what Bay Street is trying to keep secret.