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Clients love HIGH fees

Peter Katevatis - Feb 02, 2016
As a licenced investment advisor in Canada for over 20 years I can attest to the frustration the industry has with firms like Vanguard Investments Canada Inc.  Vanguard offers index funds with extremely low fees generating passive returns that beat m

As a licenced investment advisor in Canada for over 20 years I can attest to the frustration the industry has with firms like Vanguard Investments Canada Inc.  Vanguard offers index funds with extremely low fees generating passive returns that beat most actively managed mutual funds.

 

Don’t they understand that fund managers and investment advisors (like myself) need to charge clients high fees in an embedded method so that clients can’t see them?  Don’t they understand that our industry was built on providing modest returns that barely keep up with inflation while bank profits continue to surge?  It is commonly known that the public should trust the financial community and not ask silly questions such as, “What does a DSC fee mean?”

 

Vanguard Canada

 

As I complete the tongue-in-cheek portion of this post, the good news for the public is that the industry is changing.  The next wave of large changes arrives on July 15, 2016.  One of the changes is that firms must show clients (in dollars) the total fee they were charged and how their performance has been.  For example, the Investors Group Great West Life Dividend GIF fund has a Management Expense Ratio (MER) of 3.56%.  When the new rules take effect they must report the fees in dollar terms, not percentages.  Therefore, an investor with $100,000 in this fund will see an annual fee on their statement of $3,560.00.  Oh, and this Investors Group fund’s 1 year return is -8.01%.  The Vanguard annual fees range between 0.06%-0.40%.

 

I have heard comments from the public many times that they feel they “pay no fees for their funds”.  According to the Global and Mail Globefund database, there are 2,806 mutual funds in Canada charging over 3% in annual fees.  So which wonder ‘no fee’ mutual funds do these people own?

 

Two things have developed with the proliferation of ETFs and the Vanguards of the world.  Fees have come down and full-service advisors (like myself) have had to justify our value to clients.  Both developments are wonderful and quite overdue.

 

Fee compression is the result of competition and access to information.  The fund industry cannot operate in a cloak of secrecy charging high fees like they used to.

 

Secondly, full service advisors must convey their value proposition to clients.  Next time you meet with your advisor ask the simple question, “What do my fees cover?”  When clients ask me that question they will get something like this:

 

WEEKLY

  • Monitor market activity domestically and overseas
  • View all changes to client accounts on a daily basis
  • Research economy, industry and corporations for opportunity and suitability to client’s needs

MONTHLY

  • Review client holdings with respect to allocation and balance
  • Contact client on any material changes or developments with portfolio or investment managers
  • Continue skill and knowledge development with education through formal courses and industry presentations and conferences

QUARTERLY

  • Arrange meeting with client in person or electronically
  • Review current client needs and future goals
  • Assess investments with regards to performance and suitability

Now that you are getting good value for your advice all we need is a bull market to make us all look brilliant.