Episode 25 – How Financial Planning Product Fees Work
This week on Heart of Our Money talks, I’m digging into something that confuses a lot of people – how financial product fees work. I know you might be thinking, “Didn’t she do this episode already?”
Nope. that was on how your advisor is paid – product fees are totally separate and you should understand them so you can make the best choices for your bottom line.
There are so many financial products out there. Two common ones are EFTs and mutual funds and their fees are structured differently. I’m going to give you some things to think about when making your decisions and what you should expect to see on your return statements. This one is short and sweet – give it a listen now!
Hello, and welcome back to another round of “Our Heart of Money Talks.” This week I want to talk to you about how financial product fees work. Early on in the season, I talked about how financial advisors are compensated. It’s our most popular episode. I suggest you go back, check it out, give it a listen or read the transcript on our Astro financial website.
It’s episode number twenty-five. It’ll break down all the ways in which advisors are paid and I dish my personal opinion on the best one for you, and to make sure your current advisor’s getting paid the most transparent way. So go back, take a listen and check it out. So it relates to today because today I want to talk about investments and the product fees.
This is important to know because if you add up the product fees and you know how your advisor’s compensated, the total fee makes a difference in what goes in your pocket.
Now, a product fee is different and separate from the advisor compensation. So every investment product has a fee. There is nothing out there for free, unfortunately.
What we choose with those products needs to be monitored and regulated. That, of course, has a bit of a cost. So I’m going to give you some examples today. Today’s going to be short and sweet. Don’t worry. But I wanted to give a couple of the most popular investment products out there.
So let’s start with ETFs. That’s exchange-traded funds. This is a key security and it tracks an index. You can think of it as a basket of a bunch of stocks on an exchange like the TSX or the NASDAQ. ETFs experience price changes throughout the day as they’re bought and sold.
Now, it is a diversification. It’s the top companies being traded on that specific index and you get to follow the average of their overall performance. So you don’t have to do any thinking or digging. You don’t even have to know much about it. You’re just saying, “You know what, I’m good with whatever the overall averages of those top companies.”
We can all think of those name brands out there that are in the US that are hot companies, we’ve got Facebook, Microsoft, you name it. And then if you’re on the TSX, we’ve got the top Canadian companies on there. Most of them that are doing well are also banks. I remember being told that and it’s so true.
And I share this: it’s better to own the bank than owe the bank because they pay a great dividend. Anyway, sidetracked there for a second. So those are examples where you don’t really have to think too much about them. And there’s a ton of different ETFs to choose from, meaning that they follow different indexes out there.
Now every day, there’s a release of a new type of ETF product. They’ve got hybrids, they’ve got specific industries – it’s crazy. There are thousands of different products out there. Now the great news about ETFs is that product fees on these are low. And why not? There isn’t any really, truly active management happening.
You’re just saying, “You know what, I’m good with, however, that index works. I don’t need to dig deep”.
So their fees are, think around as an example, 0.40 to .60%. So they’re nice and low. These are generally the lowest product fees because there’s no active management happening. There’s no analysis happening.
They’re not having to dig deep into those specific companies to see if they’re going to grow anymore and see how they are doing. It’s not there. So it really is the cheapest way to just follow the average, no monitoring, no analyzing, just going with the average of all the companies. And personally, I’m going to share here that these are a great thing to have in there as one of your investment products because the fees are so low.
Okay, I’m going to talk about one other example out there. Another common example that is well-diversified and can be managed effectively is the mutual fund. A mutual fund is a bucket. It’s a handful of different stocks that are managed professionally and monitored and making changes as needed through this diversification.
Risk can then be monitored because you’re not putting all your eggs into one basket. You’ve got quite an assortment out there. You could have some equity, which is, think of the stock market companies. You can have some fixed income with a little less risk in there. You can have a handful of different things in there. Now of course, with mutual funds being a product, there is a fee, just like ETFs, but it is usually a little bit more.
There are some really well-managed funds out there, mutual funds that I like. And I know the managers and the product fees are 0.89 to 1%. So that is just a wee bit more than an ETF fee. This fee is important to know, and you should have it explained to you by your financial advisor.
So if you’ve got an ETF, you need to know what the actual fee is. You also need to know if you have a mutual fund. What is the actual fee for that product? You need to know because this product fee is then added with your advisor fee. After all, just like these products, a financial advisor is not going to work for free.
That’s really important. I hope that advisor is not charging you more than 1% of your total assets. Now that 1% is divided up over the year. And so one 12th, every month, you should be able to see transparently come off your statement, what that advisor fee is, and this eats into your overall returns over the years.
So you want to know.
Product fee should only be, let’s just say for an example of the one that I really like is 0.89, then advisor fee is 1%. Therefore the total fees you are paying is 1.89%. So when you open your statement and you see your rate of return right now – I’m using an example of an 11% rate of return right now since January, just as an example, for a general product, I’m not being specific.
That actually means that annual or that rate of return since January was actually 12.89%, but they have taken off 1.89% being the product fee and your advisor fee, so it comes off the return off the top. You need to know these things, and so you should also know that your rate of return is after all the fees – it’s net.
So when you open your statement, you need to know that this is after all the fees. The things I have seen come across my desk, when a client comes in and they say, “You need to help me, these aren’t performing well, what was I even invested in with this other place?”
And then I look and say, “Oh my goodness, you’re paying 2.6 to 2.8%”. Sometimes if it’s something called a segregated fund, it’s even higher. Think up to almost that 3%. That is too much. There are different types of not-so-good investment products out there. It’s up to your advisor to find the best ones and to find the well-priced ones that are managed well.
There should also be a spreadsheet. For example, in our office, we have a spreadsheet for every client that shows the total product fees. So if you asked what your total fees are we can say, “As an advisor, here are the total fees and for each individual product that you invest in, here’s the fee.”
That should be transparent. Your statement should show this and it should also show your returns and net, meaning after the fees.
So your takeaway today is to know what your product fees are, plus your advisor fee and the way advisors are compensated – I suggest you go back to episode number two to get a rundown on that. I break it down in all the different ways.
I also give my opinion of how an advisor should be compensated, my thoughts, but you should be told at the time of choosing your investment. It should be printed out on a sheet. You should have it ahead of time and you should actually know before you decide to invest.
Okay, so what is this product fee? What is the advisor fee? Understand those and then go from there.
That’s it. short and sweet today, but really important information to know about your investments. If you have any questions, send me a note at [email protected] until next week. Take care.