Understanding the Real Costs: Important Questions to Ask your Investment Advisor

When you are choosing an investment counsellor to manage your ongoing investments, it can be challenging to get a full picture of the costs involved. Of course, there is a fee associated with any investment firm – but what about all those other costs that add up?

To make the best choice for you and your family, or your foundation, you want to be able to make a clear comparison between different firms, with all costs out in the open from the beginning.

I’ve designed five questions for investors to ask investment advisors during the initial stages of choosing a counsellor. These will break down the costs involved and allow you to more easily compare investment counsellors’ offerings:

• Counsel and advice
• Investment management
• Security transactions
• Operating pool/investment funds
• Custody

1.     How Much Will Counsel and Advice Cost?

What is the investment advisor’s fee for structuring your investment portfolio so it aligns with your unique goals, lifestyle, timelines, and risk tolerance?

Every good investment counsellor, especially those working with high net worth families, individuals, and foundations, should make the effort to get to know you and your needs before they build your portfolio.

The investment firm may also offer non-investment management services. This includes offerings like wealth planning, wealth stewardship, and financial planning. If the investment counselling firm doesn’t include these services in their advice and counseling fee, you may need to pay incremental fees to attain them.

Sample Investor: $5 Million Portfolio

According to the current Canadian investment management industry’s pricing framework, the more assets you invest, the lower the percentage fees you pay. Based on my experience, I have put together an example of pricing for a client with a $5 Million portfolio.

This will give you a general idea of what to expect, although it will vary based on your specific portfolio.

Depending on the extent of the services that are included (as discussed above), advice and counsel should range between 0.50% and 1.00% for a $5 Million portfolio.

2.     How Much Will Investment Management Cost?

Investment management is the actual money management of your portfolio, including the people who select the specific stocks and bonds.

Keep in mind that investment firms have different structures for their investment management practices. These are the two main approaches:

• The people who provide the advice are the same people who conduct the investment management (i.e. selecting the bonds and stocks).
• The investment firm provides the portfolio advice, and outsources the investment management to external money managers.

While your first instinct may be to keep your money management in-house, you need to consider the fact that in-house money managers may operate with biases when giving you advice on your portfolio structure.

Costs may be slightly higher at a firm that outsources the investment management; however, investors who work with such a company gain the benefit of truly objective investment advice and portfolio structure.

Sample Investor: $5 Million Portfolio

Depending on the type of underlying investments, investment management fees should be between 0.25% and 0.75%. Canadian Government Bonds will be at the lower end of this range, while Global/International Equities will be at the higher end.

If a counselling firm is registered as a portfolio manager, they may be able to negotiate lower fees. This is due in part to the fact that the portfolio manager/investment counselling firm takes full responsibility for your investments, and therefore the investment managers do not meet with you directly. It is also related to the aggregate buying power of client assets.

3.     How Much Will Security Transactions Cost?

Buying and selling securities (i.e. stocks and bonds) come with associated commission costs:

• Commissions of Equity Securities (stocks) are traditionally transparent ‘per share’ costs.
• Commissions of Bonds/Fixed Income Securities are traditionally factored into the security price (and are therefore, opaque).

Any “Trade” has an associated cost. However, how much you pay depends on whether you are paying “Retail” or “Wholesale/Institutional” pricing. If you have a large investment portfolio, you should be paying only the lower-costing “Wholesale/Institutional” pricing.

Sample Investor: $5 Million Portfolio

You should pay about 1-3 cents per share for Equity Securities Institutional pricing, while similar pricing for Bonds/Fixed Income Securities should be less than 0.5% of the buy/sell price.

Over a year, an appropriate level of buying and selling (“turnover”) should translate into costs (as a percentage of assets) between 0.03% and 0.05%.

4.      What Are All the Costs of Operating Pool/Investment Funds?

When are Investment Funds typically beneficial?

• When the underlying investment securities aren’t easily put into “individual security format” in client accounts (e.g. Small Cap Equities, High Yield Debt, etc.).
• When the allocation to a particular investment mandate is small (less than 200K) and it becomes challenging to have a portfolio of individual securities.

Investment Funds allow you to obtain a pooled approach to your investment security purchases.

It’s important to ask about all the fees associated with each pooled Investment Fund. Ask about additional costs associated with operating a Pool Fund, as there may be costs beyond the fees for investment advice and investment management.

These Fund Operating Expenses include items such as:

• Accounting
• Audit and legal expenses
• Valuing the units/shares of the Fund
• Tracking the various investors in the Fund

Sample Investor: $5 Million Portfolio

Depending on the Fund size, number of Fund investors, and the nature of the underlying investments/securities in the Fund, you can expect an extra 0.10% to 0.30% relative to the other fees I’ve mentioned above.

Certain Alternative Investment Funds can have higher operating costs, largely because of their illiquid securities. These Alternative Investment Funds can include:

• Hedge Funds
• Private Equity
• Private Debt
• Real Estate

5.      How Much Will Custody Cost?

Custody is the costs associated with the independent safekeeping of your assets. As the investor portfolio size increases, custody costs generally decrease. Especially for investors with significant portfolios, it is very important to work with a financially strong and independent custodian.

Make sure all investment-related costs are included in their assessment. For example, custodians who offer Custody Services and Brokerage Services may provide a lower custodial cost – but this is because the costs are being subsidized by affiliated brokerage costs.

Sample Investor: $5 Million Portfolio

Expect 0.10% to 0.15% for custody costs. This often includes the cost of settlement of transactions via brokers with the custodian.

Sample $5 Million Portfolio Summary

Based on the ranges provided for our example, a $5 Million investor should see total fees and costs in the range of 0.98% to 2.25% (averaging 1.34% per year).

Making Informed Investment Decisions

You worked hard to create your wealth, and you want to make sure you’re hiring a trustworthy investment counselling firm who will provide you with real value.

That’s why it’s important to ask these questions and ensure the services you are getting for the price you are paying adds up. Transparent costs upfront will ensure you aren’t subjected to hidden fees later down the line.

Too many investment “dealers” are attempting to escape the increasing regulations to provide comprehensive reports of their performance and costs to clients. Investors must do their due diligence ahead of time to ensure they’re working with investment counselling firms that are already held to a fiduciary standard, rather than certain investment “dealers” or “brokers” who employ more dubious business practices. Read more about advisors behaving badly with CRM2 on the horizon.

>> HighView Financial Group is an investment counselling firm for affluent families and foundations. We are happy to discuss our fee and cost structure with you. Schedule a complimentary discovery session to see if we’re the right investment counsellors for you.

You may also be interested in:

• Focus on meeting your goals not on investment debates
• How to Build Sustainable Family Wealth for Future Generations (and Why It’s So Difficult to Do)
• Performance Fee Implications for Investment Fiduciaries