Paying too much in management fees?
1. Don’t just accept fees; negotiate them.
Most investment advisors will negotiate fees. It is not uncommon that some of their clients are receiving discounts while getting the same attention, advice, and service as full-fledged payers.
Smart investors are low-maintenance investors. If your investments are set up properly, you won’t need to make a lot of changes to your portfolio. You probably won’t need to see your financial advisor more than once a year, which is a good argument for a lower fee.
You can also let your advisor know that you will happily provide referrals. Some financial advisors send gifts to show their appreciation for referrals. You can tell your advisor you would rather have a reduction in the annual fee.
Start by finding out how much you are now paying in fees. In many cases it’s as simple as asking your financial advisor for a fee reduction based on the fact that you are going to be a low-maintenance account and/or you are going to send referrals. If you make these promises, be sure to follow through on them.
If you negotiate a reasonable ¼ of 1% annual fee reduction, you can save $1,000 per year on a $400,000 portfolio – money you can put toward another vacation!
2. Be wary of balanced mutual funds
A balanced mutual fund consists of a mix of stocks and bonds. Bonds generally offer a lower return, but are less risky than investing in stocks.
When you purchase a portfolio of bonds directly from your financial advisor a one-time fee of 1% is usually included in the price. There are no annual management fees, unlike when you hold your bonds in mutual funds which usually costs 2.3% in fees every year.
Most retirees should own some bonds, but by speaking to your advisor you can avoid paying ongoing management fees on buy-and-hold investments like bonds.
3. Understand the benefits of exchange-traded funds
Most pension funds use index investing to minimize fees. An individual investor can have the same low-cost exposure to the stock market by buying an exchange-traded fund (ETF). An ETF mirrors the performance of a stock index, such as the Toronto Stock Exchange, and since many mutual fund managers don’t beat the market, an ETF can outperform mutual funds.
The greatest benefit of ETFs is the money you can save on management fees. The average Canadian equity mutual fund has a management expense ratio of about 2.5%, while an ETF has a management expense ratio of about 0.3%. This means that on an investment of $20,000 you’ll save $440 every year. Over 30 years, the savings could add an additional $35,000 in your pocket.
One reason investors might not know about ETFs is that some financial planners are not licensed to sell them. Also, ETFs don’t pay advisors trailer fees, so some advisors choose not to recommend ETFs unless their client is in a fee-based account. Ask your advisor or broker about including ETFs in your portfolio.
There are other ways to save investment fees. You need to first understand how much you are paying in fees and how well your investments are performing. The Unbiased Advisor will help you make wise choices and avoid costly investment mistakes.
To win a complete portfolio evaluation by Warren MacKenzie, author of The Unbiased Advisor and owner of Second Opinion Investor Services Inc. www.secondopinions.ca, visit www.harpercollins.ca/unbiasedadvisor.
The Unbiased Advisor is available at all fine bookstores including Costco, Indigo Books & Music, and Amazon.ca.