released this month puts a price tag on how much Canadian investors pay
on average to own adviser-sold mutual funds. My advice: For what you’re paying,
you’d better be getting a lot more from your adviser than fund picks and a
recommended asset mix.
According to the study, the total cost of fund
ownership — including management fees, operating expenses, taxes and adviser
compensation — adds up to 2.21 per cent. That’s more than 10-year Government of
Canada bonds are yielding.
The study was co-authored by the New York-based
consulting firm Strategic Insight and the Toronto firm Investor Economics.
Commissioned by the
Funds Institute of Canada
, the study claims
that when you ignore taxes, the total ownership cost for Canadians who use
advisers is “comparable” with what clients of U.S. advisers pay.
Well, at least it apparently was for the funds
they chose to compare. The undisclosed universe of adviser-sold U.S. funds
selected for the study excluded most low-cost funds available either directly
or through advisers.
Nonetheless, Toronto investor advocate Ken
Kivenko praised the study for breaking down the different elements of the cost
of fund ownership. But commenting on the roughly 500 emails that he and fellow
activists received in response to the findings, Kivenko said investors were
“shocked at the high cost of advice.”
One of the dissatisfied investors was an elderly
man who had $500,000 invested and figured he was paying $5,000 a year to his
adviser for no more than two to three hours of work. “Most of the advice was to
buy more funds,” says Kivenko. “He said he never received any useful tax or
Among the other complaints about advisers:
unsuitable investments, unauthorized trading, churning of accounts to generate
commissions, excessive leveraging and misrepresentation.
This is not the typical experience that
Canadians have with advisers. But in these leaner times for fund returns,
dissatisfaction and distrust aren’t uncommon either.
Consider some of the findings of a
newly released survey
conducted on behalf of the Ontario Securities Commission’s investor
advisory panel and the Investor Education Fund. Only 20 per cent of the more
than 2,000 Ontarians surveyed “strongly agree” that they generally trust their
As for fees, 24 per cent strongly agreed and
another 39 per cent agreed that how an adviser is paid affects the advice they
give. Advisors need to give their clients greater assurance that their best
interests are being served, said the OSC panel headed by former brokerage
executive Paul Bates.
If you buy mutual funds through an adviser, the
key question for you is: Am I getting my money’s worth? You might not be, but
that doesn’t mean you can’t.
according to a 2012 study
co-authored by my Morningstar colleagues David Blanchett, the
Chicago-based head of retirement research, and Paul Kaplan, director of
research at Morningstar Canada. They concluded that astute financial planning
could increase a retiree’s income by about 30 per cent.
Key elements of value-added advice that Blanchett and Kaplan highlighted
Asset allocation that’s based on the investor’s total wealth, including
Withdrawal strategies that are adjusted over time, based on an
individual’s changing needs;
An allocation to annuities to provide guaranteed income;
Tax-efficient allocation of holdings between an investor’s registered
and non-registered accounts;
Taking account of the risks faced by retirees, including the risk of
outliving their assets.
If you’ve built up a sizeable financial nest-egg
over the years and are getting these types of services from a capable and
ethical adviser, what you’re paying is probably money well spent.