Hello everyone and welcome to the Retiring Canada Podcast. In today’s episode, we're going to discuss advisory fees.
Specifically, we will cover:
- The two most common advisory fee models in Canada
- The range of advisory fees you may encounter
- What true advisory value looks like
- Whether working with an advisor is the right choice for you
- And lastly, a few action items for you to consider
Many investors seek a formula or a magic number to help them justify the fees they pay for financial advice. The reality is that every investor has a unique financial journey, and helping investors feel positive about their financial position as they move toward achieving their goals can be a major part of the value of professional financial advice.
To clarify, today's discussion will focus on the price you pay for advice when working with an advisor, though I will briefly touch on investment fees, which are another crucial piece to understand.
First, it's important to distinguish between the two dominant systems for how advisory fees are charged in Canada: Commission-Based and Fee-Based.
Commission-Based fees mean you pay the advisor per transaction for buys and sells. The advisor may also receive compensation directly from the products they are selling.
Fee-Based fees mean you pay a percentage based on the amount of assets held at the firm. Today, the trend in Canada is toward a more fee-based model, driven by client-focused reforms that highlight how clients pay fees and bring potential conflicts of interest to light in the advisor-client relationship.
We are proudly fee-based, meaning we are paid by our clients and not by products.
Now that we've covered that, let's quickly chat about investment fees, also referred to as fund-level expenses. These are what an investor will pay to gain exposure to an investment, sometimes called the MER or Management Expense Ratio. This will depend on the type of investment you choose and can range widely, from as low as 0.1% to as high as 1.5% or more.
The discussion about investment fees deserves its own podcast, so in the future, I will delve deeper into investment types, their fees, and their overall impact on a retirement investor. Be sure to subscribe so you don’t miss it!
Back to the purpose of today's episode: understanding advisory fees. These can range between 0.5% or lower for wealthy households to 2% in some instances. Generally speaking, the more money you invest with a firm, the lower the advisory fee.
As an aside, let me share some industry-specific information you might not be aware of. If you work with an advisory team within a large firm, the advisory team does not necessarily receive the full fee you pay. Most institutions take a percentage of that advisory fee to provide a platform for advice, compliance support, and solutions for clients.
For example, if you pay the advisory team 1% to manage your million-dollar retirement assets, the $10,000 you pay in advisory fees doesn’t all go to them—likely only half does, with the other half going to the firm.
But ultimately, the percentage that goes to the advisory team or the firm doesn't affect you, as you still pay the full amount. The advisory fee is what you pay for advice or, ideally, value. This value and advice should not be limited to investment guidance only.
While crucial, your advisor should also provide value in other areas of your personal finances, from tax minimization strategies and estate planning to creating a sustainable retirement income and offering clear and concise communication and service.
While everyone should understand the fees they pay for services, choosing the lowest cost option isn't always the best decision. Many factors need to be considered, such as the quality of service, experience and expertise of the advisor, range of services offered, interactions with the provider, level of customer service, and the overall experience.
Cost is unlikely to be the primary consideration when selecting a physician or lawyer, and the same notion should apply to professional financial advice.
You may think I am biased as this is how I make my living, but I have seen how smart financial decisions can materially change someone's life forever in amazing ways. I truly believe this is the best profession in the world—you can ask my wife. She might be tired of hearing it, but it's the truth.
Why? Because I know that by delivering massive value to clients, they are better off working with me, regardless of the advisory fee they pay. In my opinion, the advisory fee paid by a client is only an issue when there is a lack of value.
Ultimately, you need to understand the value proposition your current or potential advisory team brings to the table. What are you getting for that advisory fee in actionable advice that grows your net worth? Whether it's saving on taxes, making smarter investment decisions, or having a clearly defined service model, you should know exactly what you are signing up for and how that value will be communicated to you.
Let’s discuss a hypothetical scenario of a client-advisor relationship that lasts 25 years. During that time, the clients pay an advisory fee of around $10,000 a year. Over 25 years, that is $250,000 in advisory fees. I get it—when you see that number, you might be taken aback.
Now, if we take this hypothetical retiring couple with a million dollars who pays these fees and layer in some advice, we start to see massive value. Here’s how an ongoing planning relationship with this couple might go over 25 years:
- After a thorough discussion about retirement, we create a retirement income plan that decreases their taxable payable by $5,000 a year by utilizing deferrals, income splitting, and spousal loan arrangements.
- We review their home, auto, health, and life insurance policies and restructure their plans to save them an additional $2,500 a year.
- We notice their retirement portfolios are set up tax inefficiently, with taxable investments in their non-registered accounts that should be in their TFSAs and other registered accounts, saving them another $5,000/year in taxes.
- We advise them on their CPP, OAS, and defined benefit pension start dates to be tax-efficient, considering other income sources and their longevity, optimizing their guaranteed income by $5,000/year.
- We help them save over $50,000 in taxes by utilizing the primary residence exemption on their cottage rather than their house.
- By monitoring and adjusting their finances over 25 years, we restructure their finances to wind down their holding company and shift inefficient taxable accounts to tax-preferred holdings, decreasing their estate tax and increasing their net estate by $500,000.
Adding these up, through a comprehensive approach, we save this couple nearly $1,000,000 over 25 years. Net of the advisory fees, they are still $750,000 better off working with our team. This kind of scenario happens often. So, in reality, nearly double the advisory fee could be charged and the clients would still be ahead by $250,000.
And this doesn't even factor in things like behavior coaching during turbulent markets, which can protect a retirement portfolio from poor investment decisions, or shifting retirement income withdrawal sources during market uncertainty to protect a portfolio from sustained drawdowns.
What about the value of simplifying your finances with clear and consistent communications? What about your time? What is it worth, and how much of it is saved by hiring a professional team to do the heavy lifting?
As you can see, much of what an advisory team brings to the table is hard to quantify in exact dollar terms. If you're curious about the value our team provides, check out the link in the show notes for our complimentary planning process to help you evaluate our advisory team.
At the end of the day, financial planning done right is where an advisory team can provide the most value, not stock or fund picking. A comprehensive planning approach leads to more informed decisions that compound over time to provide significant long-term value.
I guess what I'm trying to say is that you deserve value for what you pay, and in the absence of value, advisory fees can be an issue.
Now, I understand that some of you may be DIY investors or are simply trying to figure out if paying an advisor is worth it. Think of the value of advice this way: a professional athlete has a coach. Many of the best athletes in the world have coaches.
Why? The coach provides an objective point of view and discipline, constantly scanning the environment for new techniques and ways to help the athlete reach a higher level.
I see professional financial advice in the same way. An independent advisor provides an objective point of view, discipline to stay the course, and is always looking for ways to improve the client's financial journey and destination. In the process, advisors can develop a deep level of trust with clients, similar to the relationship between good coaches and professional athletes.
Here are your action items for today’s podcast:
1. What are you paying your advisory team for advice? Does this include financial planning, tax minimization, estate planning, and more?
2. Don’t settle. Explore your options. Change can be difficult, but to get the most out of your retirement journey, you may need to step out of your comfort zone and see what other options are out there.
3. Value is in the eye of the beholder, and what you are willing to pay for that value will be specific to you and your family's circumstances. Cheaper isn't always better. At the end of the day, you get what you pay for. If you want a discounted fee, you are likely to receive a discount in value in some way or another. Ultimately, it’s up to you to decide the price tag you are willing to pay for peace of mind.
That will do it for today’s episode.
For the links and resources discussed, please check out the link in the show notes or visit retiringcanada.ca.
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And hey, when it comes to your retirement, don’t take chances.
Make a plan so YOU can retire with confidence.
All comments are of a general nature and should not be relied upon as individual advice. The views and opinions expressed in this commentary may not necessarily reflect those of Harbourfront Wealth Management. While every attempt is made to ensure accuracy, facts and figures are not guaranteed, the content is not intended to be a substitute for professional investing or tax advice. Please seek advice from your accountant regarding anything raised in the content of the podcast regarding your Individual tax situation. Always seek the advice of your financial advisor or other qualified financial service provider with any questions you may have regarding your investment planning.
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