Know Your Fees

Investment management fees often make the difference between comfortable retirement living and a highly restricted 
retirement lifestyle.

Imagine you had $100,000 in your RRSP invested in low-fee ETFs (exchange-traded funds) and your average (after fee) 
return was 5%. Now imagine your spouse held basically the same investments, but because your spouse paid a 2% management fee, the net return was only 3% (40% of the total was return was paid in fees). In 30 years, you will have about $250,000 more than your spouse. So fees certainly do matter!

There is a strategy that some investors use to get significantly lower investment 
management fees. The strategy is simply to ask several financial advisors to send proposals for the management of your 
money. Tell them that fees will be a consideration and ask them to explain their fees. In these competitive situations, most advisors will cut their fees and offer lower-cost solutions, such as including ETFs in the portfolio.

The strategy works because the financial industry has changed and has become more competitive. Today, fees are generally
 lower than they were five years ago. Can loyal clients expect a call saying that since lower fees are now available to new clients, you as an existing client will also get your fee reduced? Not likely. If you agreed to a fee of 1.5% to 2%, you will be paying that fee for as long as you stay with your current advisor.

No one should move their account only to get lower fees. What is important is that your advisor should add value 
compared to what you can get by investing in a simple ETF portfolio. If you don’t know if your advisor is adding value, you can find out by asking for a written performance report that shows your performance compared to the composite benchmark. If your advisor is adding value, send referrals; if your advisor is not adding value, then any fee is too much and you should look for a new advisor.

To find out how much fees have been lowered, you can ask a friend who is a potential client to get a fee quote from 
your current advisor.

Brokerage firms encourage clients to sign up for a ‘managed account’, where you pay an annual fee regardless of the 
number of transactions. This is excellent for the brokerage firm but not as good for you, because you should not be making frequent changes to your portfolio and it is less costly to pay commissions on each trade than to pay an annual fee. Generally, actively traded accounts do not perform as well as accounts with a lower trading frequency. Sometimes an account is like a bar of soap – the more it is handled, the smaller it gets.

High fees did not matter as much when returns were 8% to 10%, but when the expected return is 4% to 5%, high mutual 
fund fees can eat up 30% to 50% of the total return – and this is unacceptable for those who want to manage their money wisely.