Are Your Investment Fees "Ridiculous"?

With February nearing and Canadians starting to think about making their annual RRSP and/or TFSA contributions, there has been a barrage of commercials on TV criticizing the 2% management fee on mutual funds. Further to this, is the message to manage your retirement savings on your own to save on these fees and retire with hundreds of thousands of dollars more. It sounds simple and seems to make sense, but is there more to it?

What do those fees actually pay for?

To start with, the typical mutual fund with a management fee of 2% or more is charging for two primary things:

- A fee to invest your money into a diversified portfolio of stocks and/or bonds

-A fee to the company that administers your account, including an advisor to provide you with advice and service on a wide range of areas

Expensive indexing, or adding value?

Starting with the "portfolio fee", if you deal with one of the Big Banks or most Credit Unions and have some type of "Select Portfolio" (aka "Fund of Funds"), you probably are paying a management fee that is 1% more than typical Index Funds or ETFs that mostly hold the same underlying investments. This is not to say that all mutual funds are not worth the extra management fees, but most "All In One" portfolios are arguably just expensive index funds. There certainly are funds that selectively pick a concentrated number of investments which have provided superior long-term returns and/or less volatility, the only catch is that past performance doesn't guarantee future performance.

If you are concerned the management fees on your investments are too high, the best place to start is by discussing it with your advisor and seeing if they offer either lower-fee investment options like index funds or ETFs, or actively managed funds that have outperformed their comparative index over the long-term.

Is advice from an expert worth 1%?

When it comes to the fees you pay for the advice and service you receive, this is where you need to determine if you are getting good value for what you pay. Some questions you can ask yourself to help decide this include:

-Does my advisor ask me questions about my financial situation and goals, and provide individualized advice and investment options based on my unique situation?

-Does my advisor explain the tax implications of the contributions I make and the accounts I have money invested in?

-Does my advisor reply quickly when I need something or have questions, and is it easy to arrange a meeting when we need to meet?

-Does my advisor help me plan for retirement, and help me understand if I am on track to retire with the lifestyle I dream of?

If you do not feel you are getting good value for the fees you are paying your advisor, that does not necessarily mean planning for retirement on your own is the best solution. A simple Google search for “value of an advisor” yields multiple different sources which have measured that working with an advisor can add 3-4% annually in returns. Meeting with other advisors generally does not cost you anything other than your time, and can help you find an advisor that will provide you with value far beyond the fees you pay.

Be careful not to break your nest egg

The investments you hold in your portfolio are only one part of the retirement planning equation, and minimizing the fees you pay can help your money grow more as time goes on. However, there is a lot to know when saving and planning for retirement, particularly around tax planning, and small mistakes can easily cost you significantly over the long run. You should carefully consider all of your options before deciding to take your financial future into your own hands, as there is much more to it than “do it yourself and retire with hundreds of thousands more”.

• Dennis Rubeniuk,  Investment Advisor

Disclaimer: This information has been prepared by Dennis Rubeniuk, who is an Investment Advisor for iA Private Wealth Inc. Opinions expressed in this article are those of the Investment Advisor only and do not necessarily reflect those of iA Private Wealth Inc. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Canadian Investment Regulatory Organization.

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