Reduce Fees & Expenses
Can the fees and expenses you are paying today for various financial products or services be reduced?
The extent to which you can reduce the fees you pay, the more money you may have available for other uses.
If you were able to reduce these fees and expenses, could you re-allocate this money into other areas that would then potentially retain more income or build more wealth?
This is why we do what we do. This is our purpose: to help you gain maximum mileage from your financial resources.
Examples: These examples are for illustration purposes only and are not guarantees.
- What are the typical investment management fees paid by most Canadians today? The average Canadian balanced mutual fund charges an annual management fee of approximately 2.5% of the value of your portfolio each and every year 1, with some retail balanced mutual funds as low as 1.5% and others exceeding 3%. This means that if you have $100,000 invested today, the annual fee charged would be approximately $2500. As your portfolio grows in value, the fee charged often remains the same at 2.5% of the value of your portfolio. As your portfolio grows to be $500,000, and the same 2.5% fee is applied, you would be paying approximately $12,500 in annual fees. At this same fee level, a $1 million portfolio could be incurring $25,000 per year in fees. On top of these fees is GST and HST.
- How much could these fees be over my lifetime? Over the past 25 years, the average Canadian balanced mutual fund has earned an average rate of return of approximately 7% per year, after-fees 2. If the after-fee return was 7% and the fees paid are 2.5%, then the before fee return will have been 9.50%. Without including the investment of new money, your $100,000 investment will have grown to be approximately $542,743. The investment management fees paid during this time will have been approximately $158,122 3.
- If I could reduce my fees by 1/3, how would this potentially improve my results? By reducing your average annual management fees by 1/3 over your lifetime, for example, you could potentially increase your total wealth from $542,743 to approximately $656,875. This is an increase of $114,132 or 21%. By reducing your fees by 1/3, you could potentially reduce your total fee expense from approximately $158,122 down to $119,635 4. In this example, the fee savings of approximately $38,486 created additional wealth of approximately $114,132. While this example is for illustration purposes only, and is not a guaranteed outcome, it raises an interesting question: do fees matter? It is our opinion that fees do matter. The greater the rate of return above the fees, the greater the amount of wealth potentially accumulated. The lower the fees, the greater the potential return may be above the fees that are charged.
- What is the impact of fees in retirement? A $750,000 portfolio that charges a 2.5% annual management fee equals $18,750 in management fees paid by you each and every year in retirement (assuming the portfolio value remains constant). Over a 20 year retirement period, this could be as much as $375,000 paid in fees5. If you could reduce these fees by 1/3, then you could potentially add as much as $123,000 to your income throughout retirement 6. Would this be beneficial to you? This outcome is not guaranteed and is only an illustration. But is this a worthwhile goal for you to consider so that, at the very least, you open the door to this potential outcome?
- How much risk does the portfolio manager have to take to overcome these fees? Our research indicates that the relationship between risk and return is a 3:1 ratio 7. This means that to increase the rate of return by 2.5%, just to cover the management fees, the portfolio manager may have to take on 3 times more risk to achieve this higher return 8. The greater the risk, the more fluctuation you will see in your portfolio over time. It is our view that it is better to try to reduce risk wherever possible.
The purpose of these examples is to illustrate that investment management fees can potentially be a significant killer of wealth. Any way in which fees can be reduced may help to retain more spendable income, potentially increase the after-fee rate of return while also potentially taking less risk in the portfolio.
Similar questions can be asked about the money you spend on other financial services such as insurance:
- Do you know how much you are spending on insurance products today through your work, your bank, your credit card or through the insurance you own personally?
- Do you know if you are paying more, for the same type of insurance, through one source vs. another? For example, does the insurance cost on your mortgage cost more than the same type of insurance coverage you could own through another source?
- If you could reduce your insurance costs by creating a more efficient insurance strategy, could you then redeploy this money into other areas which then help to retain more income and build more wealth?
Summary: You see, it’s all about paying attention to the details. When you understand the details, you can then make more informed decisions about how to i) better structure your financial affairs and ii) redeploy your hard earned financial resources so that you can potentially achieve your financial goals more effectively over time.
Are you aware of the fees, expenses and costs you are incurring today throughout your financial affairs?
- Source: Morningstar Canada Paltrak software, December 31, 2013 ↩
- Source: Morningstar Canada Paltrak software, for the period ending December 31, 2013 ↩
- Source: Douglas V. Nelson ↩
- Source: Douglas V. Nelson ↩
- Specifically: 20 years X $18,750 = $375,000 ↩
- Source: Douglas V. Nelson ↩
- Source: Morningstar Paltrak Software for the period ending December 31, 2013. Analysis of various time periods performed by Douglas V. Nelson. This analysis has been completed in 2007 and 2013 with similar outcomes ↩
- For the 15 years ending 2013, a portfolio that was 50% Canadian bonds and 50% Canadian equities had an annual standard deviation of 7.6% and an compounded return of 6.3%. By comparison, a portfolio that was 35% Canadian bonds and 65% Canadian equities had an annual standard deviation of 9.7% and an annual compounded return of 6.7%. The increase in the return was 6% while the increase in the standard deviation was 28%. In this instance the ratio between the change in risk and the return was 4 to 1. Source data from Morningstar Palktrak software. Analysis by Douglas V. Nelson ↩