Investment Fees Might Cost You $2 Million | How to know the Signs

Most Canadians know they’re paying something to invest their money—but few realize just how much that “something” could cost them in the long run. If you’ve ever wondered whether high investment management fees are worth it, this might open your eyes (and hopefully your portfolio).

Let’s take a hypothetical investor—age 30, starting with $100,000, and consistently investing $1,000 per month ($12,000 per year) until retirement at age 65.

There are four common avenues that Canadian's turn to for investments:

1. Bank-owned mutual fund: This is a basket of investments that your local branch representative will typically use to invest your RRSP, TFSA or children's RESP. The Management Expense Ratio (MER) on these funds varies greatly but can reach 2.5% for certain funds.

2. Big bank wealth management: This includes advisors at CIBC Wood Gundy, TD Wealth, Scotia Wealth Management, and so forth. The fees vary depending on how much money you bring to the table (0.5% to 1.5%), but for our smaller investor we will assume 1.5% in annual Asset Under Management (AUM) fees.

3. Independent advisor: These professionals typically carry lower overhead and fewer clients, allowing them to offer lower fees (0.2% to 1.2%). We've assumed an average fee of 1.0% for our example.

4. Robo-advisor: This includes Questwealth Portfolios and Wealthsimple, who offer passive, automated investing services. Due to the lack of human interaction, they are able to offer lower fees at an average 0.4%.

Rate of Return

For the sake of this example, we've assumed an average annual rate of return of 9% before accounting for fees. For reference, the S&P 500 returned 9.8% over the last 20 years and its Canadian counterpart, the S&P/TSX Composite Index returned 9%.

Now you may ask, shouldn't an expert advisor be able to generate higher returns than a robot? Or vice versa, no one can beat a computer, right?

The truth is that very few advisors are able to beat the average market returns without taking on additional risk. John Bogle, founder of Vanguard, analyzed 355 equity mutual funds that existed in 1970. After 30 years, only 24—just 7%—both survived and outperformed the market. His findings continue to be validated by modern data. According to the SPIVA U.S. Year-End 2023 Scorecard, 91.4% of U.S. equity mutual funds underperformed the S&P 500 over the last 20 years, based on an analysis of 1,500+ actively managed funds.

That said, we've evened the playing field and assumed a 9% rate of return for all options.

Impact of Fees

Now that we've determined that each avenue will target a 9% annual rate of return, let's assess the impact of fees on our investor's assets.

The graph above compares long-term investment value based on the 4 fee structures. Note that the difference at age 30 and 40 is negligible compared to later in life, age 60 and 65.

In the first decade from age 30 to 40, the dispersion is low. The mutual fund generates a return after fees of 6.5%, leaving the investor with $390,000. Whereas the robo-advisor returns 8.6% and grows to $463,000.

We really see the impact of compounding fees at age 50, where the investor's account balance ranges from $900,000 to $1,243,000, a difference of $343,000!

By retirement age 65, the investor is a millionaire in all scenarios... but at what cost!

• Bank-owned mutual fund: Provides a net investment return of 6.5% and ending balance of $2,614,000.

• Big bank wealth management: Provides a net investment return of 7.5% and ending balance of $3,428,000.

• Independent advisor: Provides a net investment return of 8.0% and ending balance of $3,932,000.

• Robo-advisor: Provides a net investment return of 8.6% and ending balance of $4,641,000.

That's a difference of $2,027,000. Bear in mind, the difference in fees was only 2.1%!

Similarly, the chart above demonstrates the long-term impact of fees on our individual's investment account over a 35-year horizon.

So where did the extra $2 million go?

Mutual funds and larger wealth management firms have significantly higher overhead and payroll costs compared to an independent advisor. Further, robo-advisors such as Questwealth have even lower overhead costs because the investment process is highly automated—meaning they attract a higher volume of investors and rely on technology to manage the investments.

But this doesn't mean the lowest cost option is the best strategy for you.

Other considerations

Consider the following when you are deciding the best course for your investments:

• Larger banks may be able to provide a range of services, especially if you're a business owner: personal and business banking, mortgage and lending products, insurance, and merchant services. Bundling these services may save on overall costs.

• Independent advisors can provide a personalize service. They meet regularly with their clients and provide comprehensive financial planning services to ensure that you're meeting your freedom goals.

• Robo-advisors don't offer a personal touch; however, they can be great option for someone starting out on their investing journey, someone looking to minimize fees who doesn't need the full suite of financial services.

• DIY investing with a robo-advisor is a great option, but a fee-based financial planner can help you see the full picture. Spend a fixed amount on a comprehensive plan that covers your investments, taxes, budgeting, debt, and insurance. It’s an upfront cost that can pay off for years through smarter decisions and fewer mistakes.

In either case, it's best to talk with someone in the industry you can trust. CFPs, CFAs, and CPAs are fiduciaries, bound by an ethical code of conduct to provide advice that aligns with your long-term goals. Always make sure to ask the important question in that initial meeting—what is your fee-structure?