The table below shows different asset combinations and the potential average yields that could be generated before fees. It then shows what the actual investor return or yield would be given different fee levels. Obviously, the higher the fees for given return, the lower the yield to you. Not as obvious is the fact that the vast majority of investors don’t know how this impacts them because most don’t know the level of fees they are paying for their investments.
Assumptions: (Pre-fee) annual returns of Equity, 10% and Bond, 5% Simplified Example: $100,000 capital
Basically, all variable investment products have a management fee. It is how revenues are generated in the investment industry. This fee is a cost you pay for the investment and, potentially, for other services, including, in most cases, advisor compensation. Often this fee is not transparent, in that you do not see it deducted from your gross returns. It is common for an investor to see only their net returns after fees have already been deducted. This is totally in line with the manner in which the securities regulators require they be quoted. I use the word “pay” because, although you likely don’t write a cheque, these fees are deducted from your account and your returns.
The range of fees on variable investments can run anywhere from about 0.25 per cent per annum to nearly 4 per cent per annum, depending on the investment option and advisor compensation. As stated above, these amounts are deducted from your overall returns.
One of the components in the fee structure is what is referred to as “imbedded compensation.” This is an amount paid to your advisor or the institution with whom you work. As a consumer what you need to know is:
• What is the total management expense ratio I am paying?
• What amount of the fee is for additional benefits or features of this investment?
• How much of this fee is for service and advice?
• What am I receiving from my advisor or institution for the fee I am paying?
The cost-to-benefit relationship relative to fees and advice/service is more transparent if your institution or advisor is actually adding a fee to an investment option where compensation is not imbedded. This is the usual practice where ETFs, pools or F-series mutual funds are used as the investment options.
Fees are a fact of investing. But you should be able to answer the four questions listed above, and the fees charged to you, in whatever manner they are charged, should be reasonable for what you are receiving in exchange for them.