It has been a while since I’ve opened up the mail bag to share. This time around, I received an email from Jeff looking for advice on how to reduce his investment fees.
Here is the email:
How do you go about investing in stocks without attracting fees. As it stands now – I give my money every month to a financial advisor and they invest my money for me. Now, my question is – I could go and invest in BMO or something else through my advisor – but I also cringe at the fees that I am likely to be charged – just like I cringe at what I’m being charged inside my mutual funds.
So – how do you do it without seeing those fees? Is it as simple as signing up to E-trade or something else?
Anyways, it seems like cutting out the middle man – the financial advisor – may not be a bad idea – specifically when I see that a lot of these people do not seem to have much more knowledge about the industry then I do.
Lets start off by taking a look at how some financial advisors are compensated. To my knowledge, there are typically 4 ways:
- Salary + bonus. The personal finance banker at a big bank who has access to mutual funds exclusively typically get paid on salary with bonuses given depending on total account size (ie. CIBC).
- Percentage of clients portfolio. The independent financial advisor, who may work under one of the bigger, high net worth companies like Scotia Mcleod, or CIBC Woodgundy, get paid a portion of the value of your portfolio. This fee is typically 1% of the total value of your portfolio / year. These advisors typically have access to all sorts of investment instruments, often with lower MERs to offset the annual charge.
- Commission only. There are a bunch of these advisors around, for example, RBC advisors. These financial advisors do not get paid unless you purchase one of their mutual fund (or insurance) products which typically have higher MER’s. A portion of the MER is kicked back to the advisor on a monthly/annual basis.
- Fee only planner. These guys usually work under an independent firm and their advice is usually unbiased as they don’t receive kickbacks for their recommendations. I don’t have much experience with fee only planners, but I imagine that they get paid on an hourly or per visit basis.
So Jeff, seeing the above list, you might not be “ripped off” per say, but paying for a service. Hopefully your advisor is looking out for your best interest and not his/her own. If you have a “good” advisor, and don’t have the time to research the markets yourself, then the fee may be worth it.
I think one of the biggest red flags to look out for in an advisor is if the portfolio contains a bunch of mutual funds with high MER’s (see morningstar.ca) and deferred sales charges (DSC). If that is the case and the portfolio is under performing, then evaluate the DSC penalty for leaving and find someone else. Check out WhereDoesAllMyMoneyGo for more info on how the advisor benefits from mutual fund sales.
To “cut out” the middle man, you’ll have to spend more time to research investment instruments based on your risk tolerance. If you want to stick with DIY mutual funds and want to reduce your fees, then you’ll have to go with index based funds. The TD E-Series is a popular place to start looking. Other low cost brokerages allow mutual fund purchases/sales, but typically charge extra.
If you want to trade your own stock or ETF, then you’ll have to pay commissions for every trade and be comfortable with doing your own research. Check out my comparison post of Canadian Discount Brokers for various fees/commissions side by side.
Do you guys have anything to add?
Photo credit: Nieve44/La Luz