There has been much commentary on transparent investment fees in the past several months. This one in the Globe & Mail by Preet Banarjee is excellent.
Preet makes several good points. For example, some advisers and fund providers are perhaps not worth what they receive and unbundling would mitigate that.
He also points out that most people do not notice the cost and they should. Partly right, but without a comparison to what happens with no fees that may be a red herring.
People need to know the fees so they can make decisions about whether the value received is reasonable given the price paid. I agree conditionally. If clients knew value then that would work. Thus the red herring above.
After unbundling, the result will be these:
- Advisers who do not provide excellent value will be dismissed.
- Clients with large investment balances may pay less.
- Some, maybe many, people will do it on their own.
I find none of these to be offensive. What is troubling are the other reasonable outcomes.
- Small balance accounts will be unable to use skilled advisers because their income potential will be too little to justify the work involved. That outcome is quite clear and well documented in the UK.
- The non-perceptive investors think no fees means no cost. They will discover that the costs are still there, just packaged differently. They will lose both money and time.
Here’s where those hidden costs are found. Each must be replaced in the do it yourself model.
- Fund managers get about 0.75% on average for deciding on and executing trades, maintaining custody of assets, reporting, research and structuring the offerings. Index funds cost little while some specialized funds are much more.
- Dealers supervise advisers and perform other services. Compliance reviews, marketing support, training, technical support like tax questions, planning, development tools, and handout material for clients. Usually about 0.35%.
- Adviser share is typically between .75% and .95%. For that the client gets a person to talk to who is familiar with the goals, limits, and risk tolerance. The client gets a plan, implementation and regular follow-up. Most importantly the adviser is the client’s conscience. Most financial success is not found in yield, it is found in starting and sticking to a plan of saving for a very long time. Few individuals can do that on their own.
- The last part is about .25% and that is for HST. I don’t know what you get for that.
If an investor decides to go it alone, upstream fees and costs will be as much or more. Individuals have little leverage so economies of scale will be absent. Structures like tax efficient funds and the ability to balance from cash flow instead of sale and purchase will be unavailable entirely. Balanced portfolios will require continuing attention.
Opportunity cost is real. Better to spend your time as an excellent businessperson, physician, dentist, teacher or engineer than the same time spent in becoming a mediocre investor.
Supervision, planning services, technical support and focused reading material will be unavailable as there is no dealer in the no fee structure.
HST will go away, as will its value.
The great loss for many will be the adviser. Advisers help you now; probably in ways you don’t notice. A balanced approach is about more than adjusting the portfolio. Your adviser should balance you. Knowledge, motivation, impulsivity, risk, patience, discipline.
Paying fees may turn out cheaper than paying nothing.
That’s it. It comes down to value. Good advisers are worth more and weak advisers are worth less. It is the same with dealers and fund managers. If transparent fees clarify that, then let’s get to it.
I suppose there will be someone to look after the person who is starting out and has $10,000 saved. I just don’t know who that will be. Maybe banks. For the ones that think they can get something for nothing, good luck to them.
Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.