What Am I Paying to Invest?

Making money in Canada is expensive.  In addition to high tax rates, Canadians are faced with some of the highest costs of investing of any developed country in the world.  A recent Morningstar report that ranked investments in 21 countries on regulation & taxation, disclosure, fees & expenses and sales & media gave Canada an “F” grade – the only country to receive this lowest ranking.  While I’m not suggesting you pick up and move to another country, I am suggesting investors start asking more questions.

There are several reasons why it costs more to live here and more to invest here.  Canadians are fortunate to have (comparatively) stable political and financial systems.  You might argue that it costs less to invest in a country like China but you’d be placing your money in banks and a stock market that is mostly owned by the government.  If they decide to change the rules, there’s not much you can do about it.  This kind of potential risk does (or at least should) scare most of us.  The guarantees that we receive here on our invested assets through organizations like the Canada Deposit Insurance Corp, the Investors Protection Corp and the Life Insurance based Assuris are costly but they provide us with financial protection that the citizens of most other countries only dream of.

Management and expense fees aren’t necessarily a bad thing if you’re getting good value and services for them.  What is bad is the lack of transparency in many investors’ accounts and the advisors and financial institutions that continue to disguise and omit this information from their discussions with clients.  I’ve unfortunately seen way too many people paying a lot more than they thought they were and getting very little for it.  For example – an investor walks into the bank and asks them to invest their $250,000 portfolio.  They are told the bank will charge a flat 1.5% to “manage” their money.  The bank then sends their portfolio to a third party manager who charges their own fee of 2.5% per year.  The result is a client who thinks they’re paying 1.5% are really paying 4% per year for a basic pooled fund investment and are receiving no special features or guarantees to show for it.  This is the kind of thing investors need to be more aware of and ask the proper questions before they invest.

Investment costs come in many different forms: Administration fees, management expense ratios (MERs), trade fees, front end loads, back end loads, self-directed fees, discretionary fees, withdrawal fees and account closing fees are all possible.  Each of these options has their appropriate place and should be discussed with you before you sign up.  Your advisor should tell you what fees are part of your investment plan and also how they (the advisor) will get compensated.

At the same time, it’s important to not get “blinded by the fees” and invest your portfolio solely on the lowest fee option.  I often suggest an investment option that has 0.5% higher fees per year if we have confidence in its ability to perform by 1-2% more per year.  We also regularly recommend investment options that cost more but provide a great deal of extra protection and security.  The important message here is to find lower cost options where possible and to make sure the client understands what the true costs are.