The hardest-to-answer question I get from readers is whether they’re being charged fairly by their investment adviser.
The latest reader to ask about this says she has a portfolio that reflects the fact that she’s not a big risk-taker for the most part. She wants to know what an acceptable percentage fee would be in her case.
The first problem in answering questions such as this is that portfolio size has a huge bearing on fees. The investment industry’s primary goal is to attract high-net-worth clients, which it does by offering them annual fees that could be 1 per cent of the client’s account value or even less. Smaller accounts might pay between 1 per cent and 2 per cent.
The second problem is that fees can’t be assessed without considering value. The fee charged by an adviser – either as a percentage of assets or at a flat or hourly rate – who manages a client’s investment portfolio and also provides financial planning, tax help and periodic hand-holding might justifiably be higher than someone who just managed investments.
This reader offered a clue about her own adviser’s value. She only mentioned her investments in her note to me, not any additional services she receives. Some clients have had some financial planning done by their advisers and either ignored it or didn’t find any value in it. But let’s assume this reader didn’t get a financial plan. Let’s use The Globe and Mail’s investment fee disclosure tool to see what’s fair.
I started with a portfolio valued at $250,000 to $500,000. The calculator shows that 25 per cent of clients with this size of portfolio pay 1 per cent to 1.24 per cent in fees and 5 per cent pay less. Twelve per cent pay 1.25 per cent to 1.49 per cent and the rest pay more.
The calculator also shows that 56 per cent of people with portfolios of this size get financial planning as well as investment management, and the rest just have their investments managed (2 per cent didn’t answer the question).
If you go up to $500,000 to $1-million in assets, 30 per cent are paying 1 per cent to 1.24 per cent and 6 per cent are paying less. Seventeen per cent are paying 1.25 per cent to 1.49 per cent, and the rest are paying more. Interestingly, 58 per cent of people in this higher net worth category were getting financial planning as well as investment management.
Now back to the reader asking for an acceptable percentage fee. Let’s say 1 per cent to 1.25 per cent if she’s just getting investment management. Somewhat more is fair if she’s getting additional services that she values and are helping her reach her financial goals.
Rob Carrick