YOU: Hello, friendly advisor, what is a reasonable expectation I should have for a long-term total return, before fees, for an all-equity portfolio?
ADVISOR: (Feeling all knowledgeable and superior). We pay reference to, and tend to agree with, the Financial Planning Standards Council (FPSC) guidance on this matter, which indicates a long-term average expected return for Canadian equities of about 6.5%.
YOU: An average long-term average return of 6.5%. Okay. What are the total fees that are either paid to you, or deducted by you and your firm, or any other party, in terms of dollars and percentage of my total assets?
ADVISOR: It is just a single, all-in, very competitive fee of 1.5%, which is a discounted rate because yadda yadda.
YOU: Thank you. Does that include any annual asset management fee, annual account fee, annual fiduciary fee, mutual fund fee, trading commissions, or any other fee, you will be charging me?
ADVISOR: (quite confidently), Yes, that includes all fees for any stocks, ETFs or mutual funds that are in your account. In fact, our all-in fee is significantly less than the average Management Expense Ratio (MER) of 2.3% for the typical Canadian Equity Mutual Fund, so I am doing a great job for you. A 1.5% fee is very reasonable, and well worth the experience you are buying.
YOU: So, let me just summarize, I am paying total fees of 1.5%, and a reasonable expected return is 6.5%.
ADVISOR: (Slightly concerned) Yes.
YOU: Please excuse me, I am not very good at this stuff, so the return I get to keep, after fees, is 5.0% (i.e., 6.5% – 1.5% = 5.0%)?
ADVISOR: (Now concerned) Uh, yes.
YOU: That means the total fees of 1.5% I am paying equate to a THIRD of the 5.0% I get to keep, (i.e., 1.5% ÷ 5.0% = 30%)?
ADVISOR: Now a little more concerned) Uh, yes.
YOU: And what if the stock market goes down and I lose money, do you share in my losses, or reduce your 1.5% fee?
ADVISOR: (Now somewhat sheepishly) No, that is not how it is done. We collect our fee regardless of how your portfolio performs.
YOU: So, you get 30% of my return, and I take 100% of the risk. Is that correct?
ADVISOR: I guess so, I mean if that is how you want to look at it.
YOU: Is there another way I should look at it?
ADVISOR: (Dejected) Uh, no.
What are the alternatives to using a high cost Mutual fund or financial investment advisor?