- Nanthan Clarke
Fees for Value: Is your advisor your biggest expense?
How much do you pay your advisor every year?
More importantly, what are you paying for?
These are two questions that you should be asking your advisor when it comes to fees. Make
sure you are aware of how much you are paying, both in percentages and dollar amounts, for the value that your advisor provides.
The best advisors, such as MCO Wealth, believe that your advisor should never be your
biggest expense, particularly in your retirement. We believe that someone's fee they pay
should also be relative to the value provided.
Let's compare two clients each with $1,000,000 invested. The first is a business owner
couple. They require extensive corporate planning to help reduce taxes and utilize the
corporation for their future retirement. They also have two children who are approaching
university. The second is a retiree who only needs their assets to be monitored to protect
against financial disaster. Many institutions charge the same fees for both types of investors
because most wealth management teams, or firms only implement the same fees by asset
level in these examples. At MCO, we charge the retiree less than the business owner couple
because there is significantly less work involved with the retiree.
There is also very little clarity between what a management expense ratio (MER) is and an
advisory fee. The MER is the cost of the investment product, and the advisory fee is what
you pay for advice and financial planning. However, sometimes the MER is inclusive of the
advisory fee. The difference in which fee/s you pay is determined by whether your fees are
bundled or unbundled. If they are bundled, then you only pay a MER, but it is inclusive of
an advisory fee. An advisory fee is the cost of an advisor’s value. This can include but isn't
limited to retirement planning, tax planning, behavioural coaching, etc.
There should be almost no reason not to have an unbundled fee (where an advisor's cost and the cost of the investment product are separated). The most important part is that so you as the client can see what exactly you are paying for a product whether it's a stock, bond, or fund and the advice above and beyond the performance of that product. The advisory fee does cover the help in selecting the product but isn’t the only aspect of what an experienced financial planner should provide.
Another reason for an unbundled model is that the advisory fees become tax deductible on
non-registered accounts, ultimately lowering your overall cost of the advice you receive. For
example, if you have $1,000,000 and are being charged an advisory fee of 1% you are
paying $10,000 a year. If you are in a marginal tax bracket of 40% (making at least $90,000
a year, depending on the provincial tax brackets) then you can deduct $4,000 of that from
your taxes. In a bundled fee model, this is simply not possible.
MCO Wealth feels strongly that clients should also only be charged so much as a dollar
amount. If a client has one million being charged 1% (paying $10,000 a year) and that client
grows to two million, the client is now paying double or $20,000 a year but still at 1%. Is
double the amount of work being done? In almost every case, it is not.
Let's say you are comfortable with the amount that you are paying. What does your advisor
do for you? Are they reaching out on a regular basis (at least once a year)? Do they work
with you to build a personalized financial plan every year? Do they help with generational
wealth transfers? Are they reviewing your holdings with you a couple of times every year?
If your advisor doesn't do any of these things and are just picking investments for you to
hold, then we would hope that your advisory fee is very low. We would even recommend
that you could spend a few hours researching your own investments to buy and hold.
MCO Wealth hopes that this information provides the motivation to inquire how much you
are paying and to understand what you are paying for.
If you have any questions, feel free to reach out to us at www.mcowealth.com .
Written by Nathan Clarke of MCO Wealth