Lower portfolio fee = more money in your pocket.  Or does it?

Not necessarily.

By now, you’ve probably seen or heard a Questrade, Wealth Simple, etc commercial where they try to make the non-DIY portfolio fee sound like you’ll go bankrupt, am I right?  What an ‘interesting’ marketing strategy…

Portfolio fees are a hot topic, and many investors automatically assume that lower is better.

But while lower fees can save you money up front, they don’t automatically translate into higher returns.  The metric you should be comparing is net rate of return – the growth that actually hits your pocket.  There are many portfolios with a higher fee that generate a higher net rate of return (more money in your pocket!) than a portfolio with a lower fee.

If you’re asking yourself whether you can save money by switching to a lower-fee investment strategy, we’d suggest asking a different question:

Which investment strategy is right for me?

There are four main approaches to investing: passive and active, DIY or advisor-lead.

Passive investments include exchange-traded funds (ETFs) and index funds, which include a diversified mix of stocks and sometimes fixed income.  They are based on a financial market index like the S&P 500 and come with lower management fees, especially if you’re DIY-ing it.

ETFs and index funds are designed using algorithms to mimic the performance of the market - your investments won’t underperform the market, but they won’t outperform it either.

Active investments like Segregated Funds follow a more strategic approach developed by the portfolio manager and their team who watch the market and what’s going on around the world to make strategic plays and maximize returns.  We call this the ‘human element’, but you’re not relying on algorithms and mirroring, but a real team of people working hard to outperform the benchmarks for you.

Fees for active investments are higher, but you’re paying for the portfolio manager and their team’s skills, experience, and ideally, a track record of stronger performance.

Mutual funds are another example of active investments.  Segregated funds, however, for a similar (if not on-par!) fee, offer a number of advantages over mutual funds, such as:

●       Maturity and death benefit guarantees: did you know you can guarantee 100% of what you’ve put in will be there should you pass in a downturn market?

●       Faster payout to beneficiaries:  within 14 business days compared to months, if not years for the estate to settle!

●       No probate taxes or fees:  huge savings on death which means a lot more for your beneficiaries!

●       Protection from creditors:  not only on RRSPs but also on TFSAs and Non-Registered investments

Choosing a passive or active investment strategy is a personal decision that should be made based on your unique situation, needs, and priorities.  For example:

1)     Do you want to lock in gains, need guarantees, fast payout to your kids on death, additional creditor protection? 

2)     Do you feel confident in technology and algorithms, or humans and intellect? Do you have the time to monitor the market daily and can you stomach managing the ups and downs (and being responsible for it!) yourself? 

All of these things should be considered when determining the right investment, and therefore the right fee, for yourself.  Choosing the right portfolio is far more than looking at one number, and building wealth is far more than just one factor and one number – all the elements of strategic, comprehensive financial planning are crucial to accelerating and optimizing your wealth.

Ultimately, the choice comes down to more than just management fees. When deciding on your strategy, it’s important to understand your own risk tolerance, goals, and the total cost of the investments.

Comparing investments based on fees alone is misleading. Unless the portfolios are identical, management fees are just one aspect of a comprehensive investment strategy.

Yes, you can save money TODAY with lower fees.

But the immediate savings from lower management fees can easily be negated by factors like high transaction fees, poor fund performance, and even the hidden cost of the time it takes you to be more hands-on with your portfolio.

Regardless of whether you favour active, passive, or a hybrid investment strategy, historical net returns are the best indication of a portfolio’s performance and potential - not the fee.  And if you really want to take your wealth growth to the next level – work with a Certified Financial Planner.

If you’re concerned about the impact of fees on your portfolio and want to make sure you’re making the most of your investments for the long term, book a call today.