The low down on fees

Whether your account is big or small, fees matter. This is especially true for passive or “buy and hold” investors in a low-return environment. I’ve mentioned before that Canadians pay on average the highest investment management fees in world, so how do investors judge what’s fair?

Here are some helpful goalposts:

1)    A passive/index/benchmark/”buy and hold”/”couch potato” portfolio should cost no more than 0.50% per year. Advisors shouldn’t charge too much of a markup unless they’re delivering value from other add-on services. Basic passive investing has been commoditized over the last 15 years and is now the cheap rock-bottom standard. This includes “dividend funds” too. Passive bond funds are even cheaper for balanced investors.

2)    Active investment managers that outperform their benchmarks with consistency usually charge between 1.75% to 2.5% per year. These managers should provide performance over and above market returns with some degree of persistence and be doing something special to minimize risk. My Growth Portfolio, for example, charges 2% annually plus trading costs and has been beating the market by about 15% per year since inception with about 20% less risk.

3)    Active managers who underperform their benchmarks consistently are worth zero and should be scrapped. There is no sense in paying a premium for failure.

4)    If it looks like an index and smells like an index it should cost the same as an index. In Canada many so-called actively managed funds and accounts actually resemble couch potato strategies due to liquidity constraints and herding behaviour. Unfortunately many of them still charge upwards of 2% for what is essentially couch potato performance. This is where investors should be most diligent in assessing their fees.

5)    Investors with +$1mm invested should expect a discount off the above rates whether it’s passive or active management.

6)    Generally, investors holding mutual funds should consider replacing their existing lineup with equivalent low-cost exchange traded funds (ETFs) to save on fees.

7)    Generally, investors holding over 20 individual stocks should consider replacing their lineup with a low-cost ETF to save on fees. Basic investing math says that once you hold around 20-25 individual stocks, you’re essentially diversified to the point of holding an index anyways. This can be a significant concern for investors using “separated managed accounts.”  

8)    Investing in US, European, global, foreign, BRIC, and other exotic markets is not as expensive as it once was. If an investor insists on investing in these locales a slight premium to passive investing is in order, but not much. It’s 2014 and technology has significantly reduced foreign ownership costs.

9)    Hedge funds and other specialty funds have been pressured in the US to adopt more client-friendly pricing by lowering management fees and eliminating or reducing performance fees. This is really a case-by-case situation so if you need help deciding if a private fund is fairly priced please let me know.

So how do you stack up? If you’d like to see how much you could be saving by replicating your existing portfolio with a low fee approach please get in touch. Finding an extra $1,000 (or more!) is a great feeling.

Here’s a recent article from MoneySense about fees in Canada: http://www.moneysense.ca/invest/when-investment-fees-are-and-arent-worth-it


Ben Kizemchuk is a Portfolio Manager & Investment Advisor with Altus Securities Inc. in Toronto. He offers financial planning and investment management for high net worth Canadian investors. Ben focuses on high quality investments, the Growth and Income Portfolios, low risk investing, and reducing tax.