Dale Jackson

Personal Finance Columnist, Payback Time

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The new year brings new opportunities. That includes the opportunity to boost investment returns by trimming fees.

To illustrate just how many investment dollars are diverted to fees, consider the fact that most Canadians save for retirement through mutual funds. A typical mutual fund purchased through an advisor charges 2.5 per cent of the total amount invested annually. That’s a few hundred dollars a year for a novice investor with little saved but becomes $2,500 on a $100,000 portfolio and $12,500 on a $500,000 portfolio –  and doesn’t include front or back-end loads often charged when mutual funds are bought or sold.   

Fees vary from mutual fund to mutual fund, and in some cases, funds that outperform their benchmark indices are well worth the fee. But the fact is most mutual funds don’t outperform their benchmarks and those fees could go a long way compounding over time. Imagine how those thousands of dollars can grow over the decades as investments.   

Many advisors love mutual funds because part of that annual mutual fund fee, known as the management expense ratio (MER) is returned as compensation to the advisor in the form of a commission, or trailer fee.

But there are lower-cost alternatives for investors who want the guidance of a qualified advisor, or are confident enough to go it alone.

• Many investment advisors charge a flat fee on individual portfolios that bypass mutual funds and invest directly in the markets, or through lower cost exchange-traded funds (ETFs). The fee could be as low as one per cent depending on the size of the portfolio. It’s important to know that once you establish a relationship with an advisor, fees are negotiable and services could include tax and estate planning. 
• One alternative is fee-only advisors, also known as money coaches. Fee-only advisors charge an upfront fee as you retain their services, like a lawyer. You decide when and how much of their services you need. Fees could be a couple thousand dollars to set up a comprehensive financial plan to match your personal goals and risk tolerance, and a couple hundred dollars an hour for subsequent visits – perhaps annually or when a specific personal or market event occurs.  
• A newer, lower-cost alternative is a robo-advisor, which gathers personal information about a client’s goals, risk tolerance and time horizon, and automatically invests in a portfolio of exchange-traded funds.