Recently I was contacted by a doctor practicing in Western Canada. We had previously met at the Family Medicine Forum last fall in Vancouver. She was extremely unsure about her current investment portfolio, the fees she was paying, and the advice she was receiving from her long-standing financial advisor. Some of the facts surrounding her investment situation were shocking, but unfortunately not uncommon. During the first meeting, it was rewarding to be able to empower her with information and perspective, and help her get on track.
As it seems there are many investors who find themselves in a similar situation, I believe it would be worthwhile to share her story, and perhaps help empower many other investors with the right information and perspective to start enjoying “peace of money mind”.
The doctor sent me an email requesting my assistance with a few important topics:
- A No-Obligation Review of Her Current Portfolio:
I strongly believe that any consultation with an investor should be no-obligation, no pressure, no “sales tactics”, etc. Today’s investor needs to be empowered with the ability to make informed choices without the burden of obligation.
- Fees: She was concerned with the high fees of her mutual funds, otherwise known as MERs.
Fees are extremely important to understand, as they directly reduce your investment return.
- Level of Disclosure from Current Advisor: Her current financial advisor was for some reason reluctant to disclose the amount of money he had been earning from her portfolio on an annual basis.
One of the first things an investor needs to understand is how much they are paying their advisor. How else can compensation be compared to value received?
As my practice stretches across most of Canada, meetings are either by phone, Skype, or in-person. During our first meeting these important details were covered:
- She has been investing for decades, always maxing out RRSP contributions, and more recently TFSAs.
- She is very busy, does not currently have time to oversee her own investments (not a Do-It Yourselfer).
- Described comfort level with risk overall as “medium”. She can accept some high risk to balance out the guaranteed investments.
- Main experience over the years has been purchasing mutual funds and seg. funds.
- Her busy career has made it easy to become complacent about investing over the years, and assume that her money has been working hard, and that she is being charged fairly.
- Information gathered from friends and various media have made her aware that she could do much better.
Upon examination of the current investment portfolio, a few unfortunate but important facts came to light:
Fees: She was paying 2-3.5% in annual fees.
On the surface, this is neither good nor bad. It is a fact of life that Canadians pay high fees for mutual funds. However, a 2% annual fee can make it extremely difficult for a mutual fund to perform as well as its benchmark index. This fund would need to earn its first 2% every year just to break even.
Seg. Funds: These are mutual funds with an insurance policy wrapped around them, providing a 10-yr guarantee on the value.
One issue with these funds is that they are incredibly expensive. This investor is paying an extra 1%/yr for a guarantee that she will not lose a total of 25% over a 10-yr period. As this is a guarantee against an extremely rare occurrence, the additional 1% annual fee is not even close to being worthwhile. This money goes straight from her pocket into the fund company’s coffers, with next to zero value in return.
Commission Structure: The mutual funds have been sold to her on the DSC (Deferred Sales Charge) option. This means that she is locked-in to the fund company for 6 or 7 yrs. Her advisor is paid 5% upfront commission the day she makes a purchase. If she wants to redeem in year 1 there is a fee of at least 5%. When I told her about the commission she had absolutely no idea that this amount was being paid to the advisor right away. In fact, when she had previously asked him about fees and commissions on her mutuals, he seemed insulted and refused to answer!
I honestly thought the DSC (or Back-End Load) structure had gone the way of the dinosaur many years ago. It surprises me that there are some advisors who are still selling this way. And to top it off, this is an MD with a portfolio of many hundreds of thousands, and her money was being treated the same way as a first-time investor with only $500 to invest!
Trailer Fees: She was also shocked to learn that her “advisor” was being paid 0.5%/yr annually, as a service or trailer fee (this fee is built into the annual MER).
10% Free Units: I pointed out to her that she seemed to have 2 classes of each mutual fund. The larger amount was in DSC, and smaller amounts in Front-End Load. She said that her advisor was doing this because it allowed 10% to become liquid every year, and switching to Front-End Load was in her best interest, part of the service her advisor was providing. I pointed out that her advisor was doubling his annual trailer commission by making the switch, not necessarily because it was good for her.
Based on my observations, it was evident that this busy doctor was being taken advantage of. The high fees, ancient and restricting commission structure, lack of disclosure, and bias were not placing a very high level of respect for her money and her future.
The good news is that it is never too late to make improvements, and get an investment portfolio working as hard and intelligently as possible. For this investor, changing to a more fee-efficient and ideal portfolio will not cost too much as her DSC redemption charges are minimal. She would benefit from placing a certain percentage of her portfolio in each of the three “buckets” of safety, public market, and private market. There are ways to reduce managed portfolio fees, such as index funds, ETFs, and portfolio management services that give her an opportunity to enhance return. She will be able to acquire a high-quality managed portfolio for approximately half of her current fee structure. In addition, adding a well-diversified portfolio of private exempt market products will lower overall portfolio risk, provide additional sources of income and growth, and provide inflation protection.
Check out some additional costly investment mistakes, and solutions, here.
I hope this article helped you by providing some empowering information. If you feel that your portfolio might not be working as intelligently as it should, feel free to find out by asking here. The guide to Q&A is here. If your current advisor is not providing you with open and transparent information, don’t stand for it, take charge and get a no-obligation second opinion. The possibility of saving tens of thousands on fees, lowering risk, providing greater opportunities for growth and income, and becoming confident in the direction of your money is certainly worth it.
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