How to Spot Hidden Investment Fees

Godfrey Yu
Wealth Planner and Relationship Manager 

Kai Lam
Chief Investment Officer

Do you know how much you are paying for investment fees? If you don’t—or you’re not confident that you do—you’re not alone. According to a 2020 study by the Canadian Securities Administrators (CSA), only half of Canadians who currently or usually have a financial advisor say they know how much they paid them. This may be partly due to a lack of fee transparency across aspects of the industry and the inherent complexity of some fee structures.

We at JCIC believe investors shouldn’t have to put their money under a microscope. And for this reason, we’re making it our goal to help others spot hidden costs.

Types of Fees

Fees are a standard part of investing, as they cover the costs of transactions, administration and the service being provided; however, they can vary by institution or firm and product.

While there are many models in the market, here are some common costs investors might encounter when working with financial advisors, brokers and other investment professionals:

• Commissions: A flat rate or percentage charged per transaction when buying and selling stocks.

• Custodial fees: An annual payment to the entity that owns the securities held.

• Fees for service: A set charge for selling stocks and bonds in lieu of commissions.

• Management expense ratio (MER): A total annual expense expressed as a percentage of the portfolio’s value.

• Management fees: A charge covering operating costs and sales tax, typically around 0.5% to 3% of assets.

• Trailing commissions or trailer fees: An ongoing expense that a mutual fund manager pays to a salesperson as long as an investor holds the fund.

The industry implemented a two-phase Client Relationship Model to enhance Advisor-investor relationships. In 2013, the second part, CRM2, became effective and obligated Advisors to provide an investment report and cost summary to clients, ensuring they receive complete disclosure of performance and fees associated with their accounts.   

The requirement has a shortcoming, however, as it doesn’t address all the components of an Advisor’s fee. Only the service component must be disclosed as a dollar amount—leaving the fee for maintaining the investment solution out of the direct equation.

Where Fees Could Be Hiding

Let’s say a person walks into a bank. The retail broker will invest the money in certain types of funds, charging core, administrative and third-party fees. This scenario could look something like the first column in the chart below.

Even if the Advisor is technically a portfolio manager, as in the second column, they may still outsource vast swaths of their investment decisions. Often, portfolios that contain various portfolios of other funds—also known as funds of funds—have higher investment fees because the underlying products all have annual costs of their own. An investor might not see the complete picture as the mutual fund company will charge a management fee within the MER, expressed as a percentage rather than straightforward dollars and cents.

The fees can be quite large yet go unnoticed depending on how deeply layered or multifaceted these funds get. Conversely, direct managers cut down on overlapping expenses by building most, if not all, of their investments in-house. The result: lower overall costs.

At JCIC, What You See is What You Get

Since JCIC’s inception in 1993, our fees have been transparent and covered all our services—with very few extra charges. The only price you will see over and above our fee is the normal custodian fee, which in most cases is less than 10 basis points. We may also have some nominal fees at the margin for fixed income ETFs that we use tactically—and that’s only for about 10% of our pooled funds. We use them exclusively when the transaction costs are more efficient than it would be to build the exposure directly.

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Part of our philosophy is to fully disclose and discuss fee schedules with all new investors and have Client Relationship Managers available to review as needed. You’ll find that our competitive management fee has a sliding scale according to the total amount managed for each client, decreasing the larger assets get.

At JCIC, we take extra measures to ensure transparency with our fees and that our clients get the most for their money.

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Disclosure:

Although we obtain information contained in our newsletter from sources we believe to be reliable, we cannot guarantee its accuracy. The opinions expressed in the newsletter are those of JCIC Asset Management, its editors and contributors, and may change without notice. Any views or opinions expressed in the newsletter may not reflect those of the firm as a whole. The information in our newsletter may become outdated and we have no obligation to update it. The information in our newsletter is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. It is provided for information purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor or a group of investors. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. We strongly advise you to discuss your investment options with your Relationship Manager prior to making any investments, including whether any investment is suitable for your specific needs.

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