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Doris wants to know what she should be paying for her $100,000 portfolio.
Q. I have an advisor who would like to move my retirement account to an ETF portfolio. The annual fee will be 1.95% and I have $100,000 invested. Is this a fair fee or not?
– Doris
A. What is a fair fee for financial advice? That question is very difficult to answer unless you know exactly what services are being provided. It’s a bit like asking what is a fair price for a meal without knowing what the food will be and whether you’ll be eating at a lunch counter or a fine restaurant. But that said, in my opinion, 1.95% is more than anyone should pay for an ETF portfolio managed by an advisor.
For a long time, a 1% annual fee has been pretty standard for financial advice in Canada. But that does not include the management fees of any mutual funds or ETFs in the portfolio (these fees go to the fund companies, not the advisor). According to a 2017 report, the average total cost of investing in mutual funds through an advisor in Canada was 2.14%. If you expect a balanced portfolio to return 5% before fees, then you’re sharing almost half of that with your advisor and mutual fund managers.
Doris, your advisor has quoted you a fee a bit less than that bloated average, but it’s still too high, and here’s why. Unlike actively managed mutual funds, ETFs carry extremely low management fees: it’s easy to build an ETF portfolio for about 0.10% these days. So even if your advisor adds a 1% fee for his or her services, your all-in cost should be nowhere near 1.95%. As a rule of thumb, I think a total cost of 1.25% is the top end of an acceptable fee range.
Of course, a key question here is what you should expect for that fee. If your advisor tells you he or she is using a strategy that is expected to outperform traditional index ETFs, and that you should pay more for that privilege, that’s difficult to justify. The evidence is overwhelming that most of these strategies will fail. However, if the advisor also offers comprehensive retirement planning and attentive service, and not simply access to a generic portfolio, then it’s reasonable to charge a higher fee.
One of the challenges here, Doris, is that advisors usually offer lower fees when portfolios are large. Most of those who charge less than 1%, use low-cost funds, and provide excellent planning services have minimum account sizes of $500,000 or even $1 million. For the average Canadian, whose portfolio is significantly less than that, finding high-quality advice at a reasonable cost is difficult. I wish it were otherwise.
There are other low-cost options for those with more modest portfolios—including DIY investing and robo-advisors—but all of these require a certain level of comfort with hands-on technology. This rarely appeals to those in retirement who have never managed their own investments. However, when used in conjunction with a fee-only planner (who charges an hourly or flat fee), these are a potentially good option.
Dan Bortolotti, CFP, CIM, is an associate portfolio manager and financial planner with PWL Capital in Toronto.
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