Are your fee's worth the price?
Updated: Oct 8, 2019
Recent TV commercials on investment fees
We’ve recently seen a number of commercials about investment fees. Here’s an example of one brought to our attention by a client who had some concerns after viewing it. We thought it would be best to address this commercial head on and share our thoughts with you.
The Devil Is In the Details
To any novice investor or even to the general public, the marketing tactics of investing firms are intended to make you question things – not a bad thing. As an example, this commercial has spurred investors to start questioning the fees they pay on their investments, again not a bad thing. But, that’s only part of the question – you also have to ask the value of the advice.
Examining the Facts
Admittedly, commercials don’t always give you everything you need to know. That is why it is imperative to look thoroughly into every investment endeavour solicited through all sources of media. Whether it’s an advertisement from the Internet, newspaper, or television scrutiny of its legitimacy is imperative. Just take a look at the lengthy disclaimers on any of them!
Many sales pitches start with provocative statements about how much of your retirement savings are being lost to fees. It’s a fact – advice has a price. Again, that’s only part of the question. How will your retirement look in the absence of good advice, or in the presence of poor investment management? Lower management fees are of no benefit if the net result to you is lower than the price of good advice.
There are abundant examples of illustrations and a mountain of charts showing the all-in impact of lower fees. However, it’s often the case that investment performance is ignored! It’s easy to understand that paying little or no fee is preferable, but what is harder to illustrate is the value of professional advice that guides clients not only to choosing the right investment vehicle, but also to make the tough strategic decisions, especially in times of crisis and opportunity. That is truly the value of professional advice.
What is really under the hood
Self-regulatory organizations in the financial industry of Canada are continually committed to providing transparency and disclosure. IIROC (Investment Industry Regulatory Organization of Canada) requires all of its members to adhere to disclosure of all relevant facts and information about their company. This continual need for disclosure is of utmost importance when evaluating investments.
Long before it was ever mandated by industry requirement, we demonstrated a commitment transparency of fees and have never shied away from the pricing of our service. We are proud of the advice and outcomes we have delivered to our clients for more than 30 years.
The Facts Revealed
The Cost Reality of ETF’s:
Many are described as “a service delivering professionally and actively managed portfolios at an ultra-low cost.”
The term “actively” often involves selecting different securities of even other ETF’s and compiling them in a portfolio.
Essentially with these portfolios, investors are paying a management fee and the ETF fee for products that track the market.
Investors need to look at the total cost of the portfolio and not just the fee charged by their immediate service provider.
Investment solutions that involve a basket of ETF’s inevitably involve paying a higher fee than one would normally pay by buying the ETFs separately.
Illustrations of the impact of investment management fees all assume the rates of return on one strategy versus another (such as ETF’s versus and mutual funds or an actively managed portfolio) will be the same, but that is rarely the case. The obvious fact is that if you earn the same return on two investments, but with one you pay a higher fee then the other, you will have more money at the end of the day with the lower fee portfolio. Overall, this hypothetical example of a future portfolio is completely irrelevant.
At Verus Financial
At Verus Financial, we don’t like showing what a hypothetical portfolio might look like in the future. We prefer to use real numbers and real results from our past performance to show the difference that we add to our portfolios. We truly believe that we are only as good as our last results and that it is vital to compare our performance to our competitors. We pride ourselves on delivering superior risk adjusted returns and we are proactive rather than reactive. Our investment policy statements are designed to generate alpha (returns over and above the market) and minimize beta (less risk than the market).
We have calculated a real example using our Verus High Income (VHIN) mandate to show you exactly the amount of fees paid on different fee schedules. This example uses an initial investment of $100,000 and tracks the returns and fees on our VHIN mandate, since its inception on November 12th, 2009. We have also added iShares S&P/TSX 60 Index Fund (XIU on the table) for comparison of capital appreciation. This ETF charges a Management Expense Ratio (MER) of 0.15%.
Below is a table outlining several important aspects; the total amount fees paid, the net market values (MV), the capital appreciation, the total net rate of return, and the percentage of fees to net MV.
Verus High Income Portfolio: (since inception of Nov 12th, 2009 to Feb 28th, 2017)
By looking at the table several key points stand out:
There are large discrepancies between the capital appreciations of VHIN to XIU.
There are higher fees (1.85% premium at VHIN 2% mandate), but substantially higher rates of return.
One of the most interesting ways of analyzing a financial situation is to take the opposite viewpoint and interpret the results:
If you invested in an ETF compared to Verus High Income at 2%, over the period (Nov 12, 2009 – Feb 28th, 2017) you would have missed out on $81,910.25 of capital appreciation.
This accounts for 52.11% of the XIU portfolio at the end of the period.
Overall, by investing in the ETF compared to VHIN an investor would have sacrificed half of the portfolio at the end of February 28th, 2017.
In conclusion, be extremely wary of financial advertisements and marketing strategies. Although paying lower fees could make you wealthier by 30%, it could make you poorer if those higher fees are being utilized effectively. As seen above, investing in an ETF compared to VHIN drastically decreased an investor’s wealth even when there is a 1.85% fee difference.
For over a decade we at Verus Financial have been completely transparent. We have consistently sent you a quarterly performance report, which provides you with your net performance relative to the benchmark and markets. We have also consistently provided you with an annual fee summary, which is all-inclusive. There are no hidden fees or other costs.
In some cases, management expense ratios of mutual funds can be comparable to management fees of separately managed accounts (SMA); however, a clear distinction relates to the tax deductibility of the fee. The SMA account fee is deemed to be a consulting fee by the Canada Revenue Agency (CRA) and is deductible in non-registered accounts.
Therefore, an investor in the top marginal tax bracket (47.7% in British Columbia) paying an SMA fee of 2.25% would be looking at a net fee of approximately 1.17%*. If the fee was 2.00% an investor in the top marginal tax bracket would have a net fee of 1.04%.
For a complete analysis of the comparison on fees between separately managed accounts, mutual funds and ETFs, we have provided a direct link to our Understanding Separately Managed Accounts guide.