DEFY THE NORM TO STRETCH INVESTMENT RETURNS
We live in a culture obsessed by cheap. After Amazon bought the Whole Foods grocery chain this past summer, the giant online retailer made headlines by slashing prices: everything from avocados to organic quinoa were reduced. While some analysts warned it may not appear to be what it seemed, it didn’t matter — consumers felt they were winning a cost battle.
Hopefully, one day the average Canadian investor will scrutinize their investment funds as closely as they do their grocery bill. Only last year, a study by Hearts & Wallets found that many investors either believed they do not pay fees or had no idea what they paid. To say the least, this is problematic when aiming for portfolio growth.
Over the last three years, new regulations have come into effect aimed at giving investors more information about the cost and performance of their investments. The jury is still out on the benefits of the Client Relationship Model (CRM2) but initial indications are not overly promising despite extensive publicity and public discussion about the costs of investing. INSPECT FEES CLOSELY
If we take a look at the cost of owning a mutual fund we find it is made up of three parts: acquisition costs such as front- end load commissions; ongoing costs both embedded and negotiated; and disposition costs such as redemption fees. Therefore, the best way to measure the total i nvestment expenses is looking at the cost of ownership.
One advisor we now work with had a client that for 20 years had investments with a major Canadian bank. After reviewing the account, they were able to find savings of over $30,000 in fees alone by moving his investments out of the bank.
That investor was fortunate he had sought advice from an independent advisor. All investors need to ask themselves if their fees are relative to their investment results and also if their results are consistently beating the industry benchmark. If the money managers are simply aiming to match the industry benchmark then you are effectively losing because there is less incentive for your investments to do better. TAKE CHARGE AND PAY FOR RESULTS
Blind loyalty to a particular institution can tie up your investments for years. Overall gains may be made but high fees will impact performance and long-term gains.
For example, most investors believe passive Exchange Traded Funds (ETFs) are a low- cost investment. While they may be relatively cheap from a Management Expense Ratio ( MER) perspective, the costs don’t stop there. Investors need to determine if they are getting what they are paying for by tracking the difference between an ETF’s performance and the benchmark’s performance. Be warned, this can lead to some very unsettling surprises.
The aim of a passive ETF is to mirror its benchmark so they are not designed to outperform. Even excluding the negative impact of brokerage costs to buy and sell and potential custodian or registration fees, ETFs in the majority of instances continually underperform their underlying benchmark and that costs investors in the long run.
“When I first started as an advisor, I had my clients involved in traditional investment vehicles, until I realized the impact fees and other costs were having on their portfolios long- term,” said Randy Trieber, a financial planner in Alberta.
“I discovered there were better options with individual managers, including customized management, tax deductions for fees on nonregistered accounts, lower fees in general, and just greater flexibility.”
One of the revolutionary new options developed is success- based investing. Last year, Canada’s first Payfor-Performance ™ investment service was launched by Transcend. It shifts power to investors by aligning fees to investment results relative to its benchmark. The investment managers make their money when they deliver superior returns. Unfortunately, it is still a novel concept for investment managers to earn more only after they have helped their clients exceed the benchmark return. EMBRACE TECHNOLOGY BUT DON’T SETTLE
As the wealth management industry started to embrace new technology we saw roboadvisors become the new rage on Bay Street. Their initial success forced many of the established financial service firms to launch or contemplate building competing services, making it even more difficult for investors to know what is right for them.
Many studies have shown that technology-centric human advisors are outpacing traditional advisors. Automation has disrupted many industries, but it should not replace human contact, or be seen as a cheaper option when it comes to investments.
The best and most costeffective solution is to find an advisor or money manager that uses technology as an important tool in a competitive landscape.
Technology should help, not hinder long-term results for investors and advisors. As more Canadians become savvy with investment tools, solutions need to evolve to meet their demands and not continue delivering the repackaged same-old costly investment products.
If the money managers are simply aiming to match the industry benchmark then you are effectively losing because there is less incentive for your investments to do better.