Q.
My
plan is to retire
at age 60. I am now 55. All my assets are in
registered retirement savings plans
(RRSPs), two-thirds of it in a fully managed account with a major brokerage. I find the returns quite mediocre, but
according to my adviser
they are excellent. For an average of six per cent returns in the past seven years, I am paying 1.94 per cent, which is more than $600 a month in my case.
Should I not get a self-managed account and just put all my assets in a balanced fund with low fees, or
exchange-traded funds
(ETFs)? Right now, I am in a
growth portfolio
with a mix of various stocks, bond funds, balanced funds and ETFs.
Now, we are talking about only $400,000 here. I manage a further $100,000 on my own and the account holds only various blue-chip dividend stocks. I do consider myself somewhat knowledgeable about investing and I do plan on educating myself even more once retired.
—Thank you, Moira
FP Answers:
Moira, I’d like to begin by saying 1.94 per cent is on the high side. It’s not clear to me if that number represents the fee being charged by your adviser, the ongoing costs of your products, or the sum of the two. If you want a basket of mutual funds, it is entirely possible that your blended cost might be in that range. Each fund will have its own cost, known as its management expense ratio (MER), and it is entirely possible that the blended average could be 1.94 per cent.
Oftentimes, there is a misunderstanding about what things cost. For instance, mutual funds are available in both an A class format, which typically pays the adviser a one per cent trailing commission, or in an F class format, which pays the adviser nothing, but allows the adviser to charge a separate fee instead. Since a typical advisory fee is one per cent, there is no appreciable difference between an A class fund and an F class fund with a one per cent fee, other than a minor benefit in tax deductibility for the latter. Individual securities have no ongoing costs, but you may have to pay a transaction charge to buy and sell. Similarly, ETFs often have an MER that is lower than mutual funds. These products cannot be purchased with a trailing commission embedded, but also attract transaction charges. The amount you pay for the products therefore depends on which products you use and the combination of weightings.
If you are using an adviser who charges a fee, that fee often gets applied to the amount of assets under management. An account of $400,000 might attract a fee between one per cent and 1.25 per cent. Asset-based advisory fees are often scalable so many seven-digit accounts attract a fee of less than one per cent. Let’s assume you’re using ETFs and have a blended MER of 0.25 per cent. With an adviser who charges 1.25 per cent, your total fee would be 1.5 per cent. You could save 0.44 per cent, or $1,760, annually compared with what you’re paying now.
A return of between six per cent and seven per cent is reasonable. An organization known as FP Canada, the people who confer the Certified Financial Planner (CFP) designation, put out assumptions guidelines every year in April. They say that it is reasonable to assume a long-term return for North American stocks in the six per cent to seven per cent range. However, there are several things that you may wish to consider for context.
First, the past number of years have seen markets offer extraordinarily good returns and many people have seen an annualized growth rate in the low double digits, well more than the long-term expectations I referenced earlier.
Second, those return expectations are for benchmarks and do not consider product costs and advice costs. Using the example above, your return may have been 7.5 per cent, but after paying 1.5 per cent for products and advice, you’d be left with six per cent.
Finally, it should be stressed that returns of more than six per cent may be reasonable for stocks, but there is no way you should expect anything close to that for bonds. The FP Canada guidelines for bonds going forward is closer to 3.5 per cent. As a result, a traditional portfolio of 60 per cent stocks and 40 per cent bonds might be expected to return a little over five per cent before fees and a little under four per cent after fees going forward.
I’ll leave it to you to determine whether it is reasonable to depict your returns as excellent. They’re not unreasonable, in my view, but I wouldn’t go as far as either you or your adviser. They’re certainly better than mediocre, but a far cry from excellent.
John J. De Goey is a portfolio manager with Designed Securities Ltd. (DSL). The views expressed are not necessarily shared by DSL.
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