How much should you pay in investment fees?

I’ve tried to find them on the internet, but nobody tells you what they are.

—Steve

A: Investment fees are sometimes a mystery, Steve. Quite frankly, some people in the investment industry like it that way.

Fee disclosure rules are changing this year though and many Canadians probably noticed this on their December 31, 2016 statements, with new fee and performance information now appearing that has not been so explicit in the past.

There has been more of a push towards fee-based investment advice in recent years as well, where a pre-determined fee is charged as a percentage of your investments. This should not be confused with fee-only financial planning, where a financial planner charges a pre-determined flat fee or hourly fee for financial advice but doesn’t manage your investments.

Fee-based investment advice can be good for an investor because it takes away any potential for a commissioned, transactional advisor to churn an account to increase commissions. Fee-based investment advice is also good for the advisor and their company because their income is more predictable. That doesn’t help you as a consumer, but it’s a reality.

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One of the main reasons you won’t find fee information on the web for the big banks, Steve, is that there are no set fees. There are many different ways you can invest with the banks.

All of the banks have their retail banking operations, with financial advisors who work at the bank branch. When you buy GICs, you don’t explicitly pay a fee to buy the GICs, because the compensation for the advisor is already built into the GIC rates. So you’re earning an interest rate that is already net of any so-called “fees.”

If you buy mutual funds at the bank branch level, typically they will be funds from that bank as opposed to a broad selection of available mutual funds in the marketplace. The management expense ratio (MER) fee is going to be different for every mutual fund and is available online on bank websites as well as third-party sites like Morningstar. Fees generally range from 1-3%.

With $1.2 million to invest, if you want to invest with the big banks, you should consider their wealth management divisions. If I take the banks you mention, RBC has RBC Dominion Securities, RBC Wealth Management and RBC PH&N Investment Counsel. BMO has BMO Nesbitt Burns and BMO Wealth Management. And TD has TD Private Investment Advice and TD Private Investment Counsel.

You won’t be able to find their fees online either, Steve. The main reason is that the advisors who work at these companies can work somewhat independently. They may charge their fees as commissions on each transaction. They may charge a percentage of your assets on an ongoing basis. Some of the products they use may have embedded MER fees, meaning there may be fees upon fees, so even their stated fee may not be your all-in fee. And given that there may be some discretion for the advisor to charge a fee range, between a lower and upper band, you could have two $1.2 million accounts with the same advisor at the same institution paying different fees.

On that basis, Steve, you’re never going to find the fees for a big bank on the web. You have to speak to an advisor directly. And keep in mind, the advisor in the office next to them may charge totally different fees. I think you need to think of the banks as franchises, with the individual advisors as franchisees. And these franchisees have much more discretion on individuality than your typical Tim Horton’s.

When you invest with an independent, non-bank investment firm, it is much more common to see fees stated on their website. Some of these firms may only have a few advisors and their “fee schedule” is often clearly outlined with fees generally declining as your assets rise past certain thresholds.

With $1.2 million to invest, Steve, you will have access to 99% of investment options. It may only be that 1% of advisors have thresholds of $2 million, $5 million or more.

If you are working with a transactional investment advisor, your fees will depend upon how many transactions you are doing. You might pay 1-2% in the first year to set up your portfolio and then fees thereafter could range from 0%-2%, but if you’re paying anywhere close to 2%, you should be talking to your advisor about a fee-based account that covers all of your trades.

If you are working with a fee-based investment advisor, your fees should be in the 1-1.5% range. If they’re much more, you better be getting exemplary service.

There are several firms that charge under 1%, but you would be hard-pressed to get much below 1% at a big bank with $1.2 million to invest. Their overhead costs are simply too high.

Another point to consider is that your fees may be higher if you are invested primarily in stocks, or lower if you are invested primarily in bonds. Fees can be different for different asset allocations.

Hopefully, that helps, Steve. Finding an advisor can be a challenge sometimes. I can tell you that most people have no idea how much they’re paying in fees and even less of an idea of whether their advisor is any good. So always be careful about getting a recommendation from your neighbour or brother-in-law about an investment advisor. With no disrespect to your friendly neighbour or favourite brother-in-law, chances are, when it comes to investments, they don’t even know what they’re talking about in the first place.

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

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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