Talking About Financial Matters That Affect You and Your Organization
Surprise! Your “No Fee” Investment Actually Has Fees
Apr 21st, 2017
It's January 2017. You get a thick envelope from your "financial institution". It's your year end statement. Those 18 pages that you look at for 3 seconds, just long enough to see if the number on the bottom of page 1 is bigger than last year.
What you may have missed was a new page, added waaay at the back, that tells you exactly how well your portfolio performed. Oh, and exactly how much you paid to be invested. I wrote all about this new section in a post for Manulife's Looking Forward Blog.
As you can see, financial professionals have been required to disclose costs and charges for purchases and redemption for the last 3 years. We've been required to provide you with Fund Facts that outline how risky a fund is, how it has performed in the past and what the costs for investing are. We've been required to let the investor know if and how much we earn for ongoing service (known as a trailing commission in the industry).
I have no problem with making sure investors are well informed on what they are buying. What I have a problem with is some of these "institutions" leading their customers to believe that there is no cost for investing with them. "Our funds have no loads", they say. "I get paid a salary, not a commission", I've heard. But now that all dealerships are required to disclose this "cost of investing" information, something strange happened.
Let me show you what I mean. Below is a copy of my own, $3,000 TFSA held at the largest Blue coloured Canadian bank (I only keep it there to save on my banking fees). I hold one fund and it has no trailing commission (that part that gets paid to the adviser, remember?).
If we do some math, that $27 equals about 1%....paid as trailing commissions...for a fund with no trailing commission. You see, the adviser wasn't lying; they don't get a commission for you working with them. What they didn't tell you is that there is still a trailer paid, it just goes to the dealership and they keep it. Sure, they have to pay their people, but this doesn't look like "no fees to invest" to me.
As an independent Financial Planner, I try to make sure that all my clients know that I get paid. Let me rephrase that: I provide a service and, just like you don't expect your mechanic to work for free, it costs money to work with me. I've been upfront about that since day one, even before it was cool. Whether I'm paid a set fee, through trailing commissions or based on a percentage of the assets I manage for you and your family, my kids got to eat.
Now, if all of this is news to you, I suggest you find that year end statement and have a look at that back page. Think to yourself, "self," you think, "what am I getting for 1% of my portfolio in fees?" If you can't answer that question with confidence, maybe its time to explore your options. I've written before that "Breaking Up Isn't Hard To Do" and as we enter the the mad dash to the RRSP deadline (March 1, if you're curious), there may not be a better time to make a change.