What's involved in moving investments from a high-fee advisor to a DIY setup?

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Q. I have been concerned about high fees charged on my investments and have been trying to figure out a way to move my funds without getting hit with a huge tax bill. I started with mutual funds and today I have a 60% equity and 40% income balanced portfolio plan. My last statement shows about 5% return over the last 5 years—an okay return but the 2% or more that I pay in fees (there is still not full, complete disclosure, nor and easy to understand information on all the fees charged) make me question whether I am receiving value for the amount charged. Between my wife and myself, we hold an RRSP, SPRSP, TFSA and LIRA, with a total of about $1 million (less today due to big market drop related to the COVID-19 pandemic). I have been thinking of opening multiple discount brokerage accounts in the same breakdown of account types and transferring all of the registered funds into like accounts and purchasing ETFs with those funds. But the problem I suspect is that once I transfer the registered funds, I will be told I no longer have a large enough investment to qualify for service from our existing advisor, and will have to sell all of the unregistered investments and pay taxes on the sale. (The unregistered accounts are worth about $100,000 for each of us.) I would also like to find a reputable fee-for-service advisor to help me with this, but am at a loss in determining how to go about finding one. –Brett A. I can understand your concern, Brett. Fee disclosure has been becoming more important to investors and fee compression has been increasing the difference between high-fee and low-fee investment options. Mutual funds sometimes get a bad rap, though. There are plenty of high-cost actively managed funds with fees well over 2%. But there are low-cost active options with fees under 1 % (though these may not include advice). There are passively managed index mutual funds with fees of 0.3% to 0.5% for do-it-yourself (DIY) investors. Exchange-traded funds (ETFs) are like mutual funds but traded on a stock exchange. Fees are generally less than 0.25%, and many Canadian and U.S. equity ETFs charge less than 0.1% Your 5% return over the past five years is tough to assess without more information, Brett. For perspective, the S&P/TSX 60 Index, representing the 60 biggest stocks in Canada, returned 1.97% annualized through March 31, 2020. Through April 30, 2020, it was 3.29%. And for the year ending December 31, 2019, it was 6.73%. That is a pretty big difference over just a few months, depending on the statement date reporting your returns. If you were invested primarily in Canada, you would have missed out on the fantastic returns south of the border. Consider that the S&P 500 returns in Canadian dollars for the same periods were 8.58%, 11.46%, and 13.55%. In other words, Brett, it is tough to say whether your 5% return is good or bad, as it depends on the precise timeframe and how you were invested. If you are not clear on the fees you paid, I would say there are two problems with that uncertainty. First off, it is a clear failure of the financial industry and regulators that investors do not know how much they pay. Fee disclosure has increased in recent years, but for a mutual fund investor, statements still generally report only the trailing commission paid by a mutual fund, which may only be about half of the all-in management expense ratio. Second, I think investors need to be more direct with their advisors when asking questions about fees, let alone other issues. If you have a $1-million portfolio, Brett, and you are paying more than 2 % per year in fees, that is more than $20,000 a year. Consider that for the same amount of money, you could buy a car—maybe a used car or a base model these days—every year. I cannot imagine buying a car once in my lifetime, let alone annually, without knowing the cost. If you cannot get a direct answer, I would say that alone is a reason to consider a change with your investments. If you cannot trust the people whom you pay for financial advice to give you financial information about your own investments, that is a problem. Your idea to move to a discount brokerage to buy ETFs is an option. I think most DIYers are best suited to ETFs as opposed to trying to build a portfolio of stocks and bonds. Picking and monitoring dozens of stocks is a lot of work, and buying bonds and other fixed-income equivalents directly can be difficult. A fee-for-service financial planner may be able to help you with the framework and logistics of doing so, Brett, but it is important to know they cannot provide recommendations on specific securities. They can talk about risk tolerance, asset allocation, rebalancing, tax implications, accumulation and decumulation as they relate to an investment portfolio. But they cannot tell you which specific ETFs to buy. More importantly, I think you may be putting the cart before the horse. I would speak to your existing advisor first about your fees and ask them what investment options or fee arrangements are available. If they cannot have a straight-up conversation with you about fees and offer more competitive options, you should look elsewhere. You should consider other advisors, because with $1 million to invest, you have plenty of options. You may ultimately opt for DIY at a discount brokerage, but if all you have known for 30 years is your mutual fund company, it would not hurt to explore alternatives before going straight to managing your own portfolio. If nothing else, it will help validate your decision to become a DIY investor once you have considered the alternatives. Your concern about the tax you and your wife may have to pay should you have to sell the $100,000 or so in each of your non-registered accounts is hopefully overstated. Even if the investments in these accounts have doubled in value, which is unlikely, your tax payable would probably not exceed $25,000 in total, depending on your incomes and your province of residence. I know, that is still a lot, but remember, this assumes you have a significant capital gain, and if you are paying more than 2% in fees and considering moving to ETFs with fees of almost nothing, you could save almost $25,000 in fees in the first year. It sounds as though you already know your registered accounts can be moved tax-deferred and tax-free. If you do move your investments elsewhere, remember some mutual funds have deferred sales charges (DSC) fees that are triggered upon sale. Your goal to find a reputable local advisor who offers fee-for-service advice may be tough, depending where you live. The reason is there are very few true fee-for-service advisors in Canada. The titles that advisors give themselves—like fee-for-service, fee-only, or advice-only—are basically unregulated in Canada. So, you need to be direct if you are looking for an advisor who does not sell investments or receive referral fees, or have an affiliation with an investment firm, and ask them outright to know for sure. Fee-for-service can be a tough way to make a living. Some clients hire a fee-for-service financial planner once and never again. This differs from most traditional advisors, who get paid year in and year out by all their clients. I can also tell you we do not get paid $20,000 per year by our clients, either—but plenty of investors pay tens of thousands per year to traditional advisors. and do not even know it. The point is, advisors can make more money, more quickly, by selling investments than they can in the fee-for-service business. So, there are not many such advisors out there who stick with fee-for-service long enough to make it work. Finding an advisor locally could be challenging, but hopefully a good thing that will come out of the COVID-19 lockdown is an increase in the use of technology to work with and hire professionals who you can work with remotely. Good luck, Brett. Talk to your existing advisor first, explore your options, and keep asking questions about your money to feel more empowered with the decisions you are making and the advice you are getting. Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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Tracy Ann O'Neil Yarr says:

June 14, 2020 at 2:41 pm

Dear Sir or Ms:

I’m a 59 year old teacher who started my career late [raising boys] and worked part time, subsidizing the public education system by working six days a week for four days a week pay for years, [common with women], and so will have a smaller, indexed, pension.

I’ve just inherited a new financial manager with Sunlife. We’ve spent a total of four hours together. Most of the time he was trying to sell me an insurance policy for the old folks home, or as I like to call it, “Diaper Insurance.” Even though it was right before the CRA filing deadline, he said nothing about RRSPs or TFSAs, other than to tell me my ethical investments were too high-risk and he had no choice but to move me into lower-risk mutual funds given my risk profile. Fair enough. The old guy who had managed me before apparently bent rules. My investments had done pretty well, consequently. But it was time to put my eggs in a safer basket.

When last I checked in, since Covid, my portfolio had lost 16% of its value. My advisor explained to me how lucky I was to have moved my money to a lower risk portfolio profile, or I would have lost far more with the crazy markets. However, I had put ten thousand into a TFSA ethical investment with Wealthsimple this year, [thinking to reduce taxable income: yes, that is how profoundly ignorant I am about investing] and it has returned a little over 5% in just three months.

With a little more research on line, b/c there was nothing in my seven page Sunlife quarterly report, I discovered the three ethical lower-risk funds he bought with my money are actively managed with upfront purchasing costs [undisclosed] and between .75 to 2.0 management fees, with the bulk of the money in the 2.0 range.

Further, I was dumped a couple of years ago after 32 years of marriage by my accountant husband. Until a year ago I had not so much as balanced a cheque book since 1983, and online banking put me into a panicked sweat, maybe in part because when I finally figured out what all those numbers meant I saw he had drained our joint account and run up a huge debt against the family property. Long story. Old story according to my lawyer. Thirty grand later in lawyers’ fees, I’m insulated, now.

I’ve been trying to honour the separation settlement by transferring $50,000.00 from my RRSPs to his. The Sunlife agent has us both, now, as his clients. And just the other day, I got an email saying that perhaps I had missed his earlier request [I checked. I hadn’t] for more information to facilitate the transfer: an explicit letter requesting the transfer [the ten emails already sent would apparently not suffice] and a copy of the separation agreement.

I thought, this would give this manager complete access to every bit of financial information of two of his clients and I contacted my lawyer to ask if this was standard practice, as it struck me as invasive. She assured me all he needed was the CRA form.

So. My questions:

1. My advisor only bought into the new funds a few months ago, with an upfront cost for purchasing. Then the main, most expensive Mutual Fund started to fall. Do I stay with Sunlife to recoupe the lost upfront costs and allow the mutual fund to recover? OR

2. Do I cut my losses and pull every penny and give it to Wealthsimple to invest for me? I’m 2/3 of the way through Hallam’s Millionaire Teacher but while it’s great to know go INDEX! and BALANCE! and BONDS for old folks, it doesn’t answer my question. Know that, as an investor or financial wizard, I make one helluva great English teacher.

Perhaps this is not the place to go for these sorts of questions, but I honestly don’t know where to step next. If you can’t answer my questions then maybe you might suggest a way forward? All this is new, terrifying, and overwhelming.

Thank you so much for your time. I appreciate you reading this far! and any or all advice you might give me.

Sincerely Yours,

Tracy Yarr

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