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) Well, given the low interest rate environment, long bull market, etc., yadda yadda, we think about 6%, or maybe in a good year, 10%.
YOU: So, say maybe 8% on average?
ADVISOR: (Feeling confident) Yes, 8% before fees is about right.
YOU: Okay, and what is your annual asset management fee, annual account fee, annual fiduciary fee, any other annual fee, or any trade commissions you will be charging me, expressed as a percentage of the total assets I have invested with you?
ADVISOR: (Just a little uppity) It is just a single, all-in, very competitive fee of 1%, which is a discounted rate because yadda yadda.
YOU: Okay, I see my portfolio is invested in mutual funds. What is the average management expense ratio (MER) plus the trading expense ratio (TER) that these mutual funds charge expressed as a percentage of my investments?
ADVISOR: (Here’s that superior thing again) A very competitive 1.5%. As a matter of fact, according to Justwealth.com, the average mutual fund fee in Canada is 2.2%, so I am doing a great job for you.
YOU: So in total, I am paying a 1% fee to you as my advisor, and another 1.5% in fees to the mutual fund company, for a total fee of 2.5%?
ADVISOR: (Confidently) Yes, a couple of percent is very reasonable, and well worth the experience you are buying.
YOU: So let me just summarize, I am paying total fees of 2.5%, and a reasonable total return is 8%.
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 5.5% (i.e., 8% – 2.5% = 5.5%)?
ADVISOR: (Now concerned) Uh, yes.
YOU: That means the total fees of 2.5% I am paying equate to almost half of the 5.5% of what I get to keep, (i.e., 2.5% ÷ 5.5% = 45%)!?
ADVISOR: (Now somewhat sheepishly) 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 financial advisor?