Fees, fees, fees! What are investors paying for investment management services in Canada?
I often get asked about investment fees. “How much am I paying?” or “How much do you charge?” are the 2 most asked questions. Of course it would be nice to receive any advice or service for free but to quote Stephen King: “You pay for what you get, you own what you pay for… and sooner or later whatever you own comes back home to you”. This is especially true with investment fees in Canada.
HERE’S A RUNDOWN OF THE FEES YOU CAN EXPECT FOR THE MOST COMMON TYPES OF INVESTMENT MANAGEMENT STRATEGIES:
For the “Do-it-yourselfer” or DYI: This type has the time, interest, knowledge and inclination to tend to their portfolio through all market conditions, as well as, the decisiveness to execute their chosen strategy. Like building a home, someone who can DYI is the most cost-effective way to build, but the above factors will determine the quality of the construction of your home and how well you sleep at night.
Do-it-yourself Fees: Self-directed annual admin fees between $0 and $59 per year. Trading fees ranging from $5 to $30 per trade for stocks and exchange traded funds. ETF fees range from a few basis points to over 1% annually.
“Robot”, “Smart” or “Simple” Portfolios: The target market for these relatively new products are millennials who don’t require or believe in the value of the traditional advice channel and who are fee sensitive.
Robot Fees: Usually these are held within a fee-based program which means they charge a percentage on your assets under management. The fee range is usually between 50 and 100 basis points per year depending on service levels.
Bank Advisors: Bank clients are usually dedicated to their bank’s brand and the perceived security represented by it. Banks have a small army of portfolio counsellors, investment advisors and mutual fund sales people. The client experience and offered services vary greatly, as do work experience and knowledge base.
Bank Fees: Portfolio Counsellors fees range between 75 basis points and 1.25% annually on managed portfolios. Investment Advisors can charge per transaction from 1-3% per transaction or make fee-based arrangements with clients. Fee-based programs range mostly between 50 basis points and 1.5% per year. Add admin, custodial, sub-advisor or other fees as negotiated with your Advisor. Bank Branch Advisors usually focus on the bank’s smaller investment clients. They mostly use mutual funds which charge fees within the portfolio ranging between 1.5% to 3% annually. Account size minimums usually apply at banks so checking with your bank and being in the appropriate channel is an important aspect of investing within banks.
Insurance Agents: Clients are typically people that need life, disability or critical illness first. Agent investment knowledge and business focus vary greatly.
Insurance Fees: Fee range is between 2% and 4% annually. When you think insurance, think insurance premiums. Just like auto or home policies, premiums are charged to insure your portfolio. Most insurance agents make use of sub-advisors (where someone else manages the mutual funds). Admin and other fees usually apply.
Portfolio Managers: Most Portfolio Managers (PM) hold CFA or CIM designations. Portfolio Managers typically work as sub-advisors for institutional clients such as pension funds and mutual funds. They are often smaller boutique type firms where the PM will be an owner.
Fees: Portfolio Managers usually work within a fee-based model ranging between 50 basis points to 1.5%. Admin, trading and custodial fees may apply.
How does it add up?
The illustration below is based on a $100,000 investment earning 6% over 25 years (taxes not factored).