| In today's world, it would be possible to get on an airplane and have the auto-pilot system fly the plane. Imagine a flight with no pilot. When the weather is good, it is not a problem. When there is a lot of turbulence, you want that pilot in place. Studies have shown that clients using professional advisors are more successful than investors who do it themselves. Can you stay the course in tough times? In a Market Insight article published January 23, 2008 by MFC Global states that investors who missed the best 50 trading days on the S&P 500 between January 1978 and March 2007 made an average of 1%. Those who stayed invested for those 50 days, made 9.5% compound return in the same time. Another article said that those who missed 60 days made 0% |  |
by David F. Andrews B Comm CFP CLU TEP
Never hesitate to discuss fees with your advisor.
The subject of Fees attract the most attention when market returns are soft or negative. Understanding your fees should be part of your investment strategy
Transaction Fees
The simplest form of fee payments in the market are transaction fees. They are easy to understand. It is the commission on the sale.
Purchasing a Bond is different because the "fee" is embedded. It is the result of "the spread" between the price the institution paid and the price you pay. This goes to the dealer with a portion to the advisor.
Management Expense Ratios (MER)
Retail mutual funds and segregated funds contain an "embedded" expense called an MER. Embedded means that you do not actually see the fee. The returns are reported after the MER is deducted. The MER consists of a Management Expense Fee plus the costs of transactions and marketing. Typically the Management Expense portion of the MER pays the managers and the dealers that sell the funds. Advisors receive a portion of the share that is paid to the dealer. Most funds allow the advisor to charge an up front sales fee (commission) in addition to the annual service fee paid by the fund. Many advisors waive this commission opportunity. The attached article explains that *Low fund management fees do not necessarily make better performance. Never hesitate to discuss fees with your advisor.
Advanced Compensation
When funds are sold on a deferred sales charge basis, the management expense is generally the same as that of funds sold with a Zero front-end commission or no-load. A portion of the management expense is allocated to pay service fees. What happens in a deferred sales charge environment is that a portion of the service fee is advanced to the dealer, reducing future annual service fees paid to the advisor. Do to this advancing process clients must pay aconditional early surrender charge that declines over time to zero.
Wrap Accounts
Sometimes the expression "Wrap Accounts" is used to describe a managed portfolio of funds. Fees may be embedded and not seen by the client.
"Wrap Fees" may be "unbundled". The advisor fee becomes visible. Mutual Funds purchased in the account (F-Class) continue to contain an embedded MER (for the managers), in addition to the wrap fee. One of the advantages of the wrap fee is that it may be tax deductible for non-registered accounts. Individual circumstances should be checked with you tax advisor.
Wrap accounts that expose all the fees may also be available. The investor should know how they are being charged. Information is disclosed in the Prospectus of the relevant fund and your advisor can help you find the information.
Private Wealth Management Firms may have agreements with Dealers that permit the payment of a referral fee to the advisor. Advisors cannot participate in the management of these accounts so no advisor services are attached to the referral fee. Fees of these firms are fully disclosed.
One of the areas that consumers find confusing, despite disclosure in prospectus is what they are really paying and how is it being done.
How Much is appropriate?
In the case of funds, fees can be impacted by the type of asset purchased. Fixed Income accounts are typically cheaper than equity funds. Domestic funds are cheaper than Global Funds. Expenses are different in foreign markets.
At the end of the day, the issue should not be the level of the fees, but the results provided after the fee that determines whether a specific investment makes sense.
Guarantees
Should you buy investments with guarantees attached? You pay for guarantees and they increase the management expense. The answer is that as long as you understand the fee structure and are comfortable with the relative after-fee investment return , it is o.k. You are the person who has to sleep at night. No one refers to the cost of the guarantee when you buy a GIC. Does it have a cost? One way to look at it is to say that if you could expect 6-9% on an investment portfolio and the GIC is paying 4%, you are paying 2-5% for the guarantee. That is just another way to look at it.
So what are you buying with your fees?
The first thing you are buying is management expertise. Fees paid for an individual fund, are for the stock selection and timing of purchases within that mandate. When you are buying a portfolio type investment, you are paying for manager selection in the individual funds making up the portfolio, and the tactical asset allocation. (What proportion goes in each asset class).
The second thing you are paying for is the Advisor's service. They can assist you with the selection of the correct level of risk for your situation. The single biggest danger to do-it-yourself accounts is the lack of understanding of the actual risk being assumed by the investor. With the aging population, planning advice is becoming extremely important. The service fee on investment funds paid to the advisor is the same, with or without the delivery of financial planning services. Smart shoppers are discovering that competent advisors are providing financial planning services to help differentiate themselves from the competition. With sufficient assets under administration, you can receive this valuable service "free".
Over time, professionally managed accounts tend to out perform personally managed portfolios due to the fact that when markets are tough, individuals tend to sell. One of the classic cases is the Magellan fund in the US that had returns in the double digits over many years while the individual investors buying it tended to have low or negative returns.
It Pays to Pay Fees
