High net worth investors, you have more power than you might think to lower your cost of investing.
As noted in a recent column, with $1-million or more in investable assets you should be paying advice fees in the area of 1 per cent. If you're above that level, schedule a meeting with your adviser to discuss. While you're at it, you'll want to raise the fees you're paying for investment products as well.
If you have an adviser, your total cost of investing is:
- the advice fee
- sales tax on the advice fee
- products fees (sales taxes included)
Product fees are basically reflected in the management expense ratio for owning mutual funds, exchange-traded funds, pooled funds, hedge funds and other products. The lower the cost of the products in your portfolio, the lower your overall cost of investing.
John De Goey, a veteran portfolio manager in Toronto and author of The Professional Advisor, says he uses a mix of various types of funds with a blended MER of around 0.5 of a percentage point. He figures he could halve that cost if he strictly used plain ETFs tracking core stock and bond indexes. With F-class mutual funds, designed for accounts where advice costs are a set percentage of assets, product fees might be in the 1 to 1.3 per cent range for an equity fund. Mr. De Goey's all-in fee would be in the 1.55 to 1.6 per cent range for a million-dollar client, with 0.95 percentage points accounted for by the advice fee and the rest by product fees and HST.
When discussing fees with an adviser, start with the advice fee and then move onto products. Advice fees may be dictated by your adviser's firm, with some latitude allowed for negotiation with individual clients. Product fees flow from investment choices made by your adviser on your behalf. As a client, you have the right to have cost used as a key criteria in selecting investments for your account.
An adviser using fee-based accounts should be free from compensation-based biases to pick one investment over another. These advisers get paid through the advice fee billed directly to the client, not through commissions built into the cost of products. Of course, advisers have views on the best investments and the role cost plays in selecting them. But if low costs are important to you, the client, a responsive adviser will acknowledge this.
Rob Carrick