COLUMN: Ask the Money Lady – What to pay your advisor

Dear Money Lady,

I want to change advisors for the New Year because I think I am paying too much. What should I be paying for a portfolio of about $500K. Thanks, John.

Many Canadians worry about the fees they pay their advisors and wonder if they’re paying too much regardless of the amount they have saved. Having been an investment banker for over 30 years, I can tell you, you do get what you pay for. However, fees, inflation, and future market volatility always eat away at your retirement capital, decreasing your purchasing power, and eventually forcing you to lower your lifestyle as you age. Remember, the key is to maintain a well-diversified portfolio which includes bonds, cash, and high-quality stocks. When you’re looking for an investment “partner,” try to pick an advisor who really has your best interests at heart and can help you financially plan your future. Ask them what their goals are for your portfolio and how they plan to achieve them. Understand how they’re paid and question the commissions they receive on your investments. So, let’s talk about that, what should you pay? There are two basic fee structures that most advisors adhere to – transactional or fee-based.

Transactional fees are charged with every investment transaction. This is often the case when you buy fixed income investments such as bonds. A fee is charged when you purchase the bond and then again when you sell it. There are not many advisors that still offer transactional fee structures when buying securities. They seem to have left the industry with the vintage old-school stockbrokers who had to do multiple trades every month to make any money. A method we used to call “pump & dump” back in the day. Now we have investment advisors that want to put you in fee-based plans, designed to offer more protection for clients along with a consistent revenue stream for the advisor and brokerage firm.

At the retail level, many financial planners are paid a base salary with a commission matrix based on how they grow their book of business and bring on new clients. Typically, fees are preset and based on the mutual fund you choose ranging from one percent to 2.95 percent. Investment advisors are usually on straight commission, making them much more motivated to ensure you make a profit of which they in turn are compensated on. Fee-based services range from 0.75 percent all the way up to three percent. Some advisors act as personal bankers for ultra-rich clients, doing everything for them, hence they may be able to justify the higher fee structure. But for most of us, we don’t need someone to pay our bills and handle our budgets, so if you are paying more than 1.5 percent for a fee-based portfolio, you may be paying too much. If you have different SMA products, (Separately Managed Accounts) your advisor may increase their fee up to a max of 1.75 percent.

Really John, the bottom line is, fees are all over the map and vary from one advisor to another. The cost you pay for professional financial advice should be based on your own personal comfort zone. Is your advisor a valued partner that you are willing to pay for, and most importantly are you satisfied with their services? It’s always a good idea to periodically check out the competition, talk to your friends and see what they pay. Remember, as you age and move investments into secure fixed income products with lower risk and smaller gains, your number one problem will be fees and expenses.

Christine Ibbotson is a Canadian finance writer, radio host & YouTuber. For more advice check out her YouTube channel: ASK THE MONEY LADY – Your Canadian Finance Coach.