How do you pay for the financial services and investment management direction you get from your financial adviser or institution?
I will wager that most people really don’t know. I will also guess that most people
really do not know how much they pay.
That is all going to change in Canada. By 2016, the regulators are looking to make Canada one of the countries that will have full disclosure and transparency. The rules are long and complex, but the main thrust is that all Canadian investors should have the right to know how their portfolios performed (the rate of return over a calendar year) and what they paid for that performance and any addition financial direction.
Right now, it can be very convoluted.
The most common investment held by Canadians is some form of mutual fund. Those funds have what is called a management expense ratio (MER), which is a combination of three components.
The first is the fee paid to the manager, or the group making day-to-day decisions determining the portfolio makeup. The second part is the costs associated with running the fund, including the costs of issue as well as reporting and trading costs. The final part is what is paid to the financial adviser for giving direction what to invest in.
An example of what that could look like is the manager getting 1.25 per cent, the fees being 0.15 per cent and the adviser getting one per cent for a total of 2.4 per cent. If the managers do a great job, they could be well worth the 1.25 per cent. The fees are pretty standard. The advisers, on the assumption that they give you a lot of direction, could also be worth their one per cent.
That all being said, when you look at it in dollar terms you might change your mind. If you have $500,000 in funds with a MER of 2.4 per cent, you are paying $12,000 for all of the direction. You be the judge.
If the manager under-performs and the adviser simply takes your money and provides no advice, then I would think there are going to be a great deal of questions presented by clients who are seeing these fees. Some advisers and institutions are going to have to change their business models quite drastically if they plan to survive these new disclosures.
Our office has always been sensitive to fees at all levels as the difference of even 0.5 per cent on your rate return over time can be quite dramatic. If you invest $500,000 for 20 years at 5.5 per cent, your portfolio will grow to $1,458,879 while the same amount at six per cent will accumulate to $1,603,568 for a difference of $144,689.
Les Consenheim is a senior wealth adviser with ScotiaMcLeod - Consenheim Wealth Management and can be reached at 250-372-8117 or firstname.lastname@example.org.