Sweet ‘n Low: Is Cost the Only Factor in Investing?

When it comes to investments, no one wants to have her return eaten up by fees over the years — so, logically, it always makes sense to choose the lowest-cost option, right?

It’s not as simple as that, say financial planners – low fees don’t always win in the long run, just like a high investment fees don’t predict outperformance. A focus on value — what you’re getting, instead of what you’re paying — is probably a better proposition.

According to the Ontario Securities Commission, investors don’t pay fund expenses directly, but they do ultimately impact returns — and fees vary depending on which funds you buy and which accounts you hold them in.

Fees for distribution and financial advice are usually included within a fund’s management expense ratio (MER) in Canada, along with fees for investment management, administration and operations, plus applicable taxes. At the end of 2016, the average cost of owning an actively managed mutual fund for clients using advice channels in Canada was 2.14% after taxes.

As Diane Dekanic, a certified financial planner with Financial Health Management Inc. in Calgary says, the fee is not necessarily the lone factor to consider. “The criteria, to me, is what is the performance relative to the fee. There are some mutual funds that are kind of low to mid-fee that have stellar performances, and there are some funds that do have MERs that are two per cent or greater that have stellar performance. The problem for a lot of the funds is that we’ve got moderately high fees with mediocre performance.”

In order to be an informed consumer, says Dekanic, you have to ask your mutual fund provider the tough questions. Start by asking them to provide information relating to the historical performance of the fund, where it stands in the quartile and whether there have been changes to the management team.

“Fees are important, absolutely, but they have to be looked at in the context of overall performance,” says Dekanic.

“You want something that has a track record to see how it responds to interest rate movements, market corrections, those kinds of things. ETFs are not that new, and a lot of them have a really good track record in terms of how they responded to 2008.”

Right now, fees in Canada are a real differentiator, says Sandi Martin, a certified financial planner with Spring Financial Planning in Gravenhurst, Ont.

Basic passive investments — such as an all-Canada ETF for example — are commoditized, she says, which means there is a standard, typically low, cost to access that slice of market performance.

“If somebody’s charging you 1.5 or two per cent, even 2.5 per cent, immediately your antenna should be up. You should be receiving something of much more value,” she adds.

As such, every investor should also ask ‘what am I getting for this fee?’ says Martin. For investment fees that are above and beyond the average for the asset class, there has to be a value-add. For example, she says, an index portfolio that comes with advice may be priced the same way as an active mutual fund that does not offer any advice. “So, it’s not just what the portfolio looks like, it’s all of the things that go into providing superior advice that’s worth paying for,” she adds.

“To the extent that the portfolio that they’re paying for is totally different, or at least significantly different, from just the broad market, then it starts to make more sense to pay more,” she adds.

As Dekanic notes, the problem with ETFs is that, unless someone is providing advice, it can be tough for investors to try and decide how to construct a portfolio. As such, an advisory relationship —  in terms of convenience or tailoring — may be another reason to justify a higher fee.

Ultimately, in the absence of a ‘hard and fast rule’ about what an appropriate fee might be, Martin says if you have to make the decision now, start low. From there, you can research alternatives and decide whether “more is worth more.”

“Unless you have significant non-registered assets, it really doesn’t hurt most people to start with the lowest-cost, disciplined, rules-based investment advice solution,” she says.

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