Rob Carrick recently wrote an article called Let’s stop hiding the cost of mutual fund fee in which he suggests that unbundling advisor commissions from mutual fund fees will allow investors to understand how much money they are paying for financial advice. This is a good idea and is in the works for England and Australia by the end of 2012.
Paying a separate cheque to your advisor will make their compensation about as visible as it can be. However, I’m not convinced that it will be enough.
To benefit from more fee disclosure, investors have to know the dollar amount of fees they are paying their advisor AND the cost of alternatives and the cumulative effects of the difference. How many investors have any idea how much bigger their retirement pot would be if they could save one percent on their investment costs per year?
Annual fees don’t seem significant
Most investment costs are quoted in percentages and 2% per year doesn’t seem like a high fee when compared to other common percentage charges such as sales tax, income tax. It’s the cumulative charge over time that matters. An investor may not think that saving 1.0% per year is significant, but if she knew that over 25 years, the saving would create 27% more money for her, that would mean something.
What are the cheaper alternatives?
If my mechanic quotes me a price for labour and some engine part that I’ve never heard of, how do I know if I’m getting a reasonable deal or not? An inexperienced investor might not question an investment charge because they have no idea if they are getting a deal or not. How many Canadians know that advisor commissions are negotiable if you have enough money?
This investment knowledge is something that can’t be regulated and the lack of it reduces the effectiveness of fee disclosure.
What should an investor get for his investment fee?
One of the secondary issues with high Canadian investment fees is the question of how much advice investors are getting for their money. You can justify any fee if there is enough service provided, but that doesn’t seem to be the case. A lot of investors use a financial advisor to select investment products and don’t get any real financial planning. How can the government educate those people that if they are paying a full service fee, they should be getting full service investment advice?
Separating advisor compensation charges from mutual fund company fees is a step in the right direction. I’m not sure if it will really help most investors by lowering their investment fees or by increasing the amount of financial advice they get. The reality is that there are a fair number of lower cost investment products available in Canada and the majority of Canadian investors are just not interested.