Why Fees Matter:
A majority of investors do not know how they are charged for investment and wealth management advice. Below are three samples of how firms charge.
Transactional Fees: This type of fee is charged per trade made. For example, if your investment advisor were to call you to sell ABC Company for $20,000 and buy XYZ Company for $20,000, and the transaction commission was $400 for the sale and $400 for the new purchase, your transactional fee total would be $800.
Mutual Funds: If you own a portfolio of mutual funds, you will notice each fund has a management expense ratio (M.E.R). Let’s say you own 10 funds with an average M.E.R of 2.25% and the total value of your mutual fund portfolio is $500,000. Your annual fee for managing this portfolio of mutual funds would be $11,250. You would not see this amount withdrawn from your account, however, as the fee is hidden within the fund returns, making it more difficult to know what you are actually paying.
Fee Based: If you had a portfolio worth $500,000 and your advisory team charged you a flat fee of 1.5% to do an unlimited number of trades/transactions, this would be considered a fee based portfolio. Your total fee for the year would be $7,500 no matter how many trades were made in your account. If your portfolio consists of individual stocks and bonds, there are no added fees associated with this compensation structure, such as those seen with mutual funds. What you see is what you get.
To see how much advisory fees can impact your bottom line, please see the chart below which demonstrates the additional wealth generated by lowering fees on a $1 million dollar portfolio from 1.50% to 1.00% over 25 years. The magenta and blue portfolios show the same annualized investment return of 6%, however the blue fund has a lower fee. With the decrease of 0.50% in fees, you would save $391,783 over 25 years.
At Sarai Wealth Management, we conduct a fee only business. Your total fee includes investment, financial, business succession, tax, will, estate and trust planning. All of these services are provided by RBC Dominion Securities' team of chartered accountants, estate planners, and advisors. We pride ourselves on providing comprehensive wealth management for our clients at no additional cost. Recently, we have also introduced a new service called Premier Banking which provides our clients with a specialized banker for their personal needs, at no additional cost to them.
If you do not know how your current investment firm structures their fees, or if you are not receiving any planning advice included in your advisory fees, please feel free to contact me directly at 604-257-3225 to discuss your portfolio.
Kyle G. Sarai, MBA