Next time you're shopping for mutual funds, you might want to ask for some advice. After all, you are paying for it -- whether you know it or not.
Most mutual funds Canadians buy are called A-class funds (the "A" is for "adviser"), in which the dealer who sells you the fund is paid for his or her services by the fund itself, in the form of continuing commissions known as "trailer fees." Those fees make up a portion of a fund's management expenses, which are deducted from the fund's assets (typically 0.5 per cent to 1 per cent of the total assets under management are paid out in trailer fees each year, representing roughly 40 per cent of a typical equity fund's annual management expense ratio, or MER).
That means that, indirectly, you're paying up to 1 per cent of the money you have in that fund every year to the people who sold it to you. If you have, say, $10,000 in your fund holdings, then you're paying up to $100 a year; if you have $100,000, then you're handing over as much as $1,000 a year.
As the Investment Funds Institute of Canada notes on its website, this fee "is paid for the value-added service of investment planning provided by salespeople." In other words, you're paying for investment advice simply by virtue of owning A-class mutual funds.
"If you're going to pay that fee anyway, you may as well at least get some of these other advice-based services in exchange for what you're paying, otherwise you're obviously flushing some money down the toilet," says John De Goey, a senior financial adviser at Assante Capital Management Ltd. and author of The Professional Financial Advisor.
It's a good idea to sit down with your financial service provider at the outset and discuss what sort of advice he or she is prepared to give you in return for your business. You might be surprised how much -- or how little -- you can get for your money.
"Every client who buys mutual funds from an adviser should be asking, 'What sort of service do you provide?'" says Dan Richards, president of Strategic Imperatives and a consultant to the financial industry.
If you're buying mutual funds through a discount broker, you can expect nothing. Discount brokers will provide you access to the product and some research, but advisory services aren't part of their package; that's how they keep trading costs to a minimum.
"You're paying for the product and the advice, even though, at the discount brokerage, there's categorically, unequivocally, no advice," Mr. De Goey says. "There's no real point in buying A-class funds through a direct discount-brokerage channel."
If you're walking into your bank branch, you can expect more. The big banks typically have in each branch a financial planner who can assess your financial position and investment goals, and recommend an appropriate mix of investments.
While this isn't by any means full financial advisory services, it's typically adequate for the average bank-branch client who is investing relatively small amounts of money, argues Steve Geist, president of TD Mutual Funds. "That's probably absolutely sufficient for their needs."
Full-service financial advisers can not only help you with planning your investments, but can provide written recommendations, help you with budgeting, advise you on debt management, help with tax and estate planning, and discuss your insurance needs. Not all full-service advisers are experts in all these areas, but at very least they should be able to discuss broad strategies and steer you to other experts to give you further help, should you need it.
"Financial advisers are sort of like GPs. They have to be good at the diagnosis, but they might often times refer it off to a specialist if it's a really unique case," Mr. De Goey says.
The advisers who are actually qualified to provide some of these non-investment services themselves might charge an additional fee for them. But many won't -- especially if they are managing a large portfolio. "If it's a big enough client, they might do it as part of the relationship," Mr. Richards notes.
It's worth remembering that in general, the more money you have to invest with a single adviser, the more advisory services you can expect. "The bigger the account, the more clout you have," Mr. De Goey says.
Regardless of the level of advice you want or the amount your adviser is willing and able to deliver, there are some things the experts think you should look for in any advisory relationship.
One of them is objectivity. Even though advisers are being paid commissions directly by the fund company, a good one will be guided by your needs.
"Your priorities are distinctly different from mine. Until we make an objective assessment which is not product dependent, can we really be matching your needs?" says Steve Howard, president and chief executive officer at Advocis, the national association for Canada's financial advisers.
David Feather, president of Mackenzie Financial Services Inc., one of the country's leading mutual fund companies, adds that this sort of ongoing assessment should stretch beyond the money you're putting in the hands of that adviser. "A great adviser understands the entire client situation -- not the client situation with respect only to the money that adviser will manage for the client, but more broadly than that."
Mr. De Goey adds that investors should look for "elements of professionalism" in their adviser. A good sign of this is a willingness to define -- in writing -- all the details concerning the relationship between the adviser and the client.
"You should look for investment policy statements, no matter who you work with. You should look for a written financial plan, no matter who you work with. Probably a letter of engagement, and a letter of compensation disclosure, so that we can lay out the scope, exactly what will be done and the terms and conditions that will used in performing the role," he says.
"It's good to have that sort of thing in writing because, for the relationship to work well, the best thing is to have no surprises."
Do your homework before
choosing an adviser.
Think about what your needs are, and pick someone who is strong in those areas. Different advisers can deliver different skills. "I think you have to be clear whenever you enter into an advisory relationship just what it is that the adviser can and will do," says John De Goey a senior financial adviser at Assante Capital Management Ltd. "That usually means a reasonable amount of due diligence up front to make sure that there's a good fit."
Set out the terms of reference with your adviser, in writing.
This should spell out what services he or she plans to provide for you, how often you will talk and meet, and who will initiate contact to discuss your finances. That way, you both know what is expected of you. "Establishing the relationship at the outset is very important," says David Feather, president of Mackenzie Financial Services Inc.
Create an investor profile and
financial plan before you buy.
An adviser should find out as much about your financial position, your goals, the timeline you have to reach your financial targets, your personal and professional situation, and the amount of risk you're willing to accept before he or she starts developing a plan for your investments and your overall finances.
"It does take time to do, but probably not as much time as people would think," says Greg Allen, regional manager in Toronto for BMO Mutual Funds. "At the end of the day, if you have a clear goal that you're trying to achieve . . . you have it in writing and you have something to review."
Make sure there's regular
"You should expect an ongoing assessment of how your investments are doing, and how you're doing," Mr. Richards says. You and your adviser should set out a schedule of regular meetings -- at least once a year -- to discuss the performance and mix of your investment portfolio, and any changes in your personal or financial circumstances. You might also want to consider quarterly phone calls to quickly review your situation.
© 2007 The Globe and Mail. All rights reserved.
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