Clients have been thanking us for the recent investment statements, mentioning this new layout is simpler and more informative. I’m very glad to hear this. And while statements can never be perfect, and may hold more (or less) information than you wish, thank you for letting us know this is moving the right way for you. THREE AREAS we touch in this month’s letter include: trailer fees; losing your freedom to choose; and what really matters most to you.
WHAT IS A TRAILER FEE – and WHY?
QUIZ: this refers to (i) charge for pulling a trailer on the 407? (ii) traffic fine for a trailer lacking rear lights? (iii) ongoing compensation for financial advice. #3 is the winner. And for anyone paying such fees without getting proper financial advice, we should be speaking together.
Seven or eight other fees also widely occur but we’ve been waiving these. You now see these in your statements with a “0” or “N/A”.
- Administration fee, 0.
- Annual account fee, 0.
- Switching fee, 0.
- Trustee fee, 0.
- Fee-based charge, 0.
- Other charges, 0.
- Sales charge, 0.
- And thus far we’ve given our certified planning “at our cost”.
The only fee that remains, then, is the “trailing commission” typically near 1%. Very simply, this is what the fund companies pay to Quadrus (or to London Life, or Great West Life) of which part is then paid to our firm for staffing, office overhead, compliance, advisory compensation… Households with larger account values get lower pricing, so we are then reducing this trailer by 20-40%. *
A Royal Bank vice-president was recently explaining these new investment statements to lawyers and accountants in our Estate Planning Council. She noted these fees occur even with ‘no-load’ funds from the internet or bank branches. Many never realized the 1% charges they were paying, plus other investment costs. She repeated the old saying, “there’s no free lunch.” So the point was clear: people need to focus on the results of advice for which they’ve been paying. And if there wasn’t advice, that highlights a very different cost because it’s well proven, Advice Builds Wealth.
Repeated studies show people working with a Certified Financial Planner build 3-to-4 times as much wealth as those who lack such advice. Even if people start with modest savings (or if wealth has come from other sources such as commuting a pension, inheritance, selling a property or business) the results speak for themselves. Advice builds wealth, reduces risk, sustains value, so you can be financially secure for Life!
If people have failed to receive advice we need to know this. We want to meet them, and put them on a safe course to enjoy life and wealth, today and always. Don’t let them keep missing what is rightfully theirs.
THREATENING HOW YOU GET ADVICE.
You may have heard in the media, the CSA (Canadian Securities Administrators) aim to eliminate all advisor compensation related to financial products and investment accounts. If CSA has their way (as in Australia and the U.K.) compensation will be eliminated from all financial products. Advisors then will only be paid by invoicing clients. Maybe it’s good, but in UK and Australian experiences they lost 2/3rds of their financial advisors.
- Original problem was, sales people were paid without giving professional advice.
- New problem: most advisors found it hard to continue (unless in a big bank or mega-firm).
- Independent firms now charge specified planning fees &/or as a percentage of invested assets.
- Worse: people avoid fees, but save less, trade more often, buy fads on the web, without advice.
- Better solution: require professional & ethical standards; let people choose whom and how to pay.
Canadians today still have an open choice how to get financial advice. Either they pay an invoice directly, or such fees are built into their financial products. We realize there’s a cost, and people can choose how to pay it. News columnists are saying invoices are good, embedded fees are bad. But there’s no such relationship. The logic breaks down. At the end of the day you should know what you’re paying, and confirm you’re getting value for it. That’s what matters.
In favour of embedded fees, many clients prefer the simplicity of knowing their advisor is automatically paid without invoices or special payments, and we’ve always been able to know the costs and benefits. If you want this choice to remain, email your Member of Parliament, and also add your name and email address at http://www.financialadviceforall.com/. This will especially help young people, new families, lower income, people straining under high debts, and any who resist opening their pocket for independent professional advice (by the hour or by the plan).
If you favour a fee-only world where everyone is forced to pay directly (by the plan, by the hour, or as a portion of invested assets) then no action is required because CSA and the media are already driving this agenda. In my personal position it doesn’t matter – but people should have choice – because you know there are costs to manage investments (as listed at the top of this page) and certainly to guide your financial security and protect your estate.
Either system can work, whether fees are included or billed-extra. What I would truly regret though is the negative impact if financial guidance becomes too expensive for others to access it. Removing choice does NOT seem to me as a public service.
* Let's clarify too that cost is the wrong bandwagon. In many cases our clients pay lower fees and yet get stronger results. Of the typical 1% fees noted in your statement many of our clients qualify for significant discounts. By comparison a fee-only world has fees normally ranging 1% to 1.5% …and refuses clients whose assets fall short of a required threshold.
A major bank last year hit the news for firing advisors who weren’t bringing in enough fees (and what’s that do for client-trust?). This week’s news about TD is true of every bank raising fees wherever possible. So a fee-only system isn’t the holy grail. Enforcing professional ethics on advisors and institutions, this alone will correct unethical sales practices.
PORTFOLIO RESULTS WITH REDUCED RISK.
What matters finally isn’t cost but NET RESULTS (also adjusted for risk). Media are silent on this. The elephant in the room, the killer on the loose, isn’t the cost (because you can choose this) but it’s failing to define the risks and align wealth for lifelong safety – i.e. “results”.
We recently compared two portfolios of Canadian and Global Dividends, Real Estate, International Equities. Plan #1 starts with a 0.3% fee but adding costs for trading, custody, advice, and taxes it’s soon 1.5% or more. Plan #2 is all-inclusive at 2.3%. Seeing the picture here, which plan do you feel gives better overall results for your investing?
- Plan 1 pays lower dividends, has higher risk, with an unwieldy 8,500 holdings.
- Plan 2 pays more dividends, reduces risk, in a strategic portfolio of 400 holdings.
What matters most of course is the bottom line. Plan 2 gave more return with less risk: 8.6% net yearly return, compared to 6.2% (over 5 years).
If you glance into your personal returns of the past 5 years you may find your returns 6%, not 8%. This is because your investments include fixed-income which naturally pays less. Also you didn’t have the exact proportion of these funds for the identical time period.
But you also realize that in times like 2008-2009 our planning wasn't just 10% less risky, it was 35% to 60% less risky. Avoiding the abyss of stock markets at their worst is most vital to keeping your money. And seeing values recover three-times faster, even four-times faster, is proof of our “Life Income Mandates” to assure your financial health through all seasons to come.
Be sure to share this conversation with friends!
Yours in Financial Security for LIFE!
Brian Weatherdon, Certified Financial Planning, Retirement Coaching.
905-637-3500 x 223. 1-877-937-3500 x 223. Brian@SovereignWealth.ca
Author: A Lifetime of Wealth. Protecting Life... Halton Retirement Study.
** This monthly letter touches on key strategies in Canadian and global investing and financial planning. This letter is not an offer to sell any kind of security, insurance, or program. Historical returns and risk measures are not a valid guide to future performance. Returns whether historical or forecast are from publicly available sources and research from a variety of firms including but not limited to GLC, RBC, CIBC, Mackenzie, Franklin Templeton. Opinions reflected in this letter belong solely to the author and no other body is responsible for the content expressed here. We value opportunity to consult alongside your legal and accounting firms to advance your financial security and unique goals. We are grateful always to receive your comments and questions.