How much did you pay in financial advisors fees in Canada last year? If you’re like many investors working with a financial advisor, the answer may be “too much.”
On average financial advisor fees can range between 0.5% to 2% per year, depending on the value of your portfolio. This is paid in addition to any hourly or fixed fees for speaking to your advisor, which can range from $0 to $350 per hour.
While this might not sound like a lot upfront, the fees add up as your account value grows. Below, I’ll outline the average financial advisor fees in Canada, discuss whether or not they’re worth it, and give you some helpful tips to reduce fees on your end.
Around one-third of Canadians worked with a financial advisor in 2022, according to a recent report from Financial Planning Canada. The same report also showed that 40% of Canadians “lost sleep” due to stress induced by their current financial situation.
Even though the average Canadian household under 35 has over $100,000 in savings, the stress of having enough for the future still looms ahead. Retirement, family planning, buying a house, and estate planning are enough to give anybody a headache.
To help them make better decisions and plan for the future, many Canadians rely on financial advisors to help direct their investments.
While financial advisors typically offer sound advice, their help doesn’t come without a fee.
If they do their job well, financial advisors should be able to help their clients build wealth and increase their savings. However, the high annual fees and hourly advisor fees imposed by financial advisors can cut into your profits.
If you go into a financial institution and start working with a professional financial advisor, you’ll typically be informed of two primary fees:
- An annual account management fee, represented as a percentage of your investments
- An hourly fee (or set rate) for the advice you’re receiving (this is generally for fee-based advisor)
Account Management Fees
Account management fees can be as low as 0.5% for investment accounts with a value near $1 million. Smaller accounts may pay between 2% and 3% in annual fees.
This is where they get you.
2% doesn’t sound like a lot upfront until you start doing the math. For example, if you have $200,000 in your investment account, a 2% fee equates to $4,000 per year.
Assuming that your investments continue to grow at a healthy rate, this number will only increase. Over the course of 5 years, you could easily pay enough account management fees to buy yourself a new car.
Hourly rates can vary depending on the financial institution and your advisor’s accreditations, which are generally reserved for fee-based advisors. Expect to pay between $0 and $350 per every hour that you’re sitting down or speaking on the phone with your advisor.
Here, it pays to research and plan a little bit before you meet with your advisor. The shorter that you can make the meeting, the less money you’ll spend upfront in fees.
In the long run, though, these hourly fees pale compared to the account management fees imposed by financial advisors for managing your account, which is why I recommend it as a good option if you need to do some initial financial planning.
Check out Money Coaches Canada to find a good fee-based advisor near you.
Are Financial Advisor Fees Worth It?
The real question here is, “Are the fees worth it?”
In a perfect world, the 0.5% – 2% annual fee you’d pay to your financial advisor would be money well spent. The investments that your advisor makes on your behalf would grow at a steady rate, and the account would ultimately generate enough profit for you to barely realize the fees.
Unfortunately, we don’t live in a perfect world. Since the pandemic, the markets have been in constant flux and increased volatility, meaning that even the best-managed accounts aren’t performing as well as they would have in the past.
That’s not even accounting for the high inflation and devaluing of the Canadian dollar.
Here’s another factor to consider – between 65% and 85% of mutual fund account managers are underperforming ETFs like the S&P500, according to a report from S&P Global.
That’s not to say all financial advisors don’t have value. A good financial advisor can help with the emotions of going through portfolio losses and guide their clients to commit less errors. However, you won’t need this if you have confidence and are educated in your investing abilities.
If that is the case, this means that working with a financial advisor often isn’t as profitable as simply investing in a good ETF fund in the long run. At the end of the day, anybody can invest in ETFs using a platform like Wealthsimple or the platform’s automated robo-advisor Wealthsimple Invest, which comes with minimal fees.
The hourly and annual account management fees charged by financial advisors aren’t the only fees either. There are several other “fine print” fees that you may be charged, depending on how often you trade or when trading within registered accounts like TFSAs, RRSPs, and others.
The Management Expense Ratio (MER) represents the total cost of managing and operating the fund. This is represented as a percentage of the fund’s average net assets over a period, typically annually.
In other words – the MER is the annual account management fee.
MER fees are charged by financial advisors, fund managers, or other institutions responsible for managing the assets within the fund.
The primary reason for charging MER fees is to help cover the cost of managing the investments within the fund. These costs include:
- Salaries for financial advisors and fund managers
- Administrative fees
- Legal fees
- Overhead (banks, offices, services, apps, etc.)
Ultimately, MER fees reduce the overall return on investors’ profits. The fees are deducted from the fund’s net assets (not profits).
Let’s say the stock market had a bad year, and your account realized little to no profits. You would still have to pay the MER percentage fee based on the value of your fund on top of your advisor fees!
If you’re comparing financial advisors and fees, you should look very carefully at the annual MER fees charged by each institution. The lower fee you can find, the better.
If you thought the MER was a problem, then you’ll be even more surprised to learn that some account managers charge additional sales commissions when they make trades on your behalf.
Not every financial advisor or institution charges commissions, though. Some only charge the MER fee mentioned above or roll the commission into the MER (which is often the case with the level-load commissions mentioned below).
Here’s an overview of the different types of sales commissions that your financial advisor may charge as part of your ongoing account management:
- Front-end load: Sales commission charged when an investor purchases shares in a fund. This is deducted from the initial investment amount, reducing the money invested in the fund.
- Back-end load: Sales commission charged when an investor sells shares in a fund. The back-end load typically decreases over time, which motivates investors to hold onto their investments for a longer period.
- Level-load: Ongoing sales commission charged annually as a percentage of the investor’s assets. These are often combined with other fees, such as the management expense ratio (MER).
Account managers typically try to focus on longer-term trades and investments. This minimizes the daily work that goes into actively managing your account and allows each manager to take on more individual clients.
With this in mind, day trades or swing trades that last less than 30 days are generally frowned upon. To discourage investors from requesting short-term trades, some financial institutions and account managers impose additional fees on these types of trades.
One of the main advantages of investing through a self-managed account or using a robo-advisor is that fees are minimal on short-term trades. In some cases, you might not pay any fees.
Additional account management fees may be imposed if you’re investing through a registered account like a TFSA or RRSP. These fees vary from institution to institution, so it’s a good idea to ask about any registered account fees upfront.
Looking to avoid (or at least reduce) financial advisor fees? Here are some smart investment ideas to consider.
In many cases, investing in a reliable ETF will generate a better return than investing through a financial advisor. ETFs are funds that include multiple assets in industries, such as:
Want to learn more about investing in energy ETFs? Check out my list of the best energy ETFs in Canada.
Robo-advisors automatically invest your money for you, allowing you to set your own risk tolerance and even pick out choice companies you want to invest in. Robo-advisor fees are typically far lower than those imposed by financial advisors, and the results are similar.
To avoid short-term trading fees and commissions, make fewer trades with your account manager. Focus on long-term investments with limited volatility.
Although financial advisors can offer good investment advice, the fees they impose on customers often aren’t worth the investment. I would say that the majority of Canadians are better off using a robo-advisor platform or investing in reliable ETFs with a self-managed account.
Not sure which option is best for you?
Keep on reading to see my breakdown of investing with ETFs vs robo-advisors!