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By Chris Ambridge, Transcend
Special to the Financial Independence Hub
Providing a service costs money, but paying a fee deemed as an unnecessary amount has come under attack from consumers at all levels. Think banking fees, or the perception of “hidden fees” on phone bills to brokerage and investment fees. Consumers are demanding more value and in some cases winning the battle.
There is more scrutiny on fees than ever before. Studies have shown many investors either believe they do not pay anything or have no idea what they do pay (Hearts & Wallets: Wants & Pricing — What Investors Buy & Competitive Ratings — 2016).
But everyone understands nothing in life is free and clients have a right to know what they pay.
The long-view of investment fees
For centuries, if an ordinary person had any liquid wealth the best they could hope for was meagre interest on their cash. Then, as the concept of companies developed, the notion of profiting from an equity investment emerged and stock exchanges were established in seventeenth century Europe to trade equities.
In Canada, much of the early development was raised in the London market, with public shares of large companies such as the Hudson’s Bay Company. The Toronto Stock Exchange (TSX) was created in 1861, and 17 years later the TSX was the second official stock exchange in Canada.
Commission-based Investing
At this time, being a stockbroker was a comfortable, genteel and very lucrative profession. By providing investors with access to markets, brokers earned fixed commissions of about 2% or more per trade. This lasted until May 1975, when negotiated commissions were introduced, leading to increased competition and a decrease in direct share ownership. Currently only 17% of the Canadian financial wallet is invested directly in stocks, down from 30% in 1990 when it was second in importance only to short-term deposits.
Asset managers on the rise
For less well-heeled investors, the first modern mutual fund was created in Canada in 1932. They were slow to catch on and grew very little between 1930 and 1970. However this was reversed in the 1970s when investors wanted greater stability following the oil crisis.
The cost of owning mutual funds 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. The cost of ownership, rather than the Management Expense Ratio (or MER, which often contains trailer fees representing the commission paid to brokers and mutual fund dealers for advising clients to purchase the funds) is the most effective way to measure total investment expenses.
Recent developments have provided retail investors with the opportunity to lower investment costs of mutual funds due to the proliferation of no load funds, online/discount brokerage firms, fee based accounts and Exchange Traded Funds (ETFs) which have dramatically altered the investment landscape.
Traditional asset managers charged investors significant fees, ranging from 1.0% to 1.5% of assets under management for high net worth clients, a practice that is still common today.
Success-based Investing
Now a new fee concept is on the market. Last year, Canada’s first Pay-for-Performance™ investment service launched. It shifts power to investors by aligning fees to investment results relative to benchmarks. While a basic admin fee of 0.25% is charged, investors do not pay any more unless the performance of the funds exceeds specific industry benchmarks. Meanwhile, the investment manager earns income only when they deliver superior returns.
The idea here is that clients need to feel their money has value. And when results achieved are better than industry standards, the fee paid seems worthwhile: like it was a good investment.
How to find value
Knowing if you are getting value for your investment portfolio can be tricky for some. Blind loyalty can tie up investments for years with a particular institution. Gains are made, but how do we know we’ve reached our maximum goals with the money available?
Ask yourself three questions:
- Are my fees clear and understandable?
- Do the fees put my interest first?
- Are the fees reasonable for the service provided?
It may not yield all the answers you want, but it’s a start.
Chris Ambridge is President of Transcend & Chief Investment Officer of Provisus Wealth Management, a portfolio manager launched in 2007 that manages over $450 Million in assets for private clients. He began his investment career in 1987 as a Financial Analyst at IBM Canada, and worked in investment counsellors and private client investing in Canada and abroad. After returning to Canada he became Head of Investment Management Services for First Asset Advisory Services in 2003. Chris has an MBA from the University of Windsor and is a Chartered Financial Analyst.
