FEE-ONLY Investing Explained
What are the benefits of a FEE-ONLY relationship?
- A flat fee is charged for asset management rather than a percent of portfolio value … I don’t get paid more just because you have more money.
- Fees are transparent and reported on an on-going basis … you see how much you pay me for my services.
- No commissions, loads or hidden charges.
- Access to lower cost products such as F-Class mutual funds and Index Funds.
What are F-Class and Index Funds?
F-Class mutual funds units (the F stands for FEE) are sold without commissions or service fees, and stripping out that cost offers investors a much lower management expense ratio (MER). They are designed to allow me (a fee-based advisor) the ability to offer funds to clients without imbedded compensation. This leads to the advice being completely unaffected by the products you choose because I am not motivated by trying to earn a commission.
Index funds are a portfolio of investments that are weighted the same as a stock exchange index in order to mirror its performance. Indexing is a form of passive investing. The primary advantage to such a strategy is the lower expense ratio since there is no active manager to pay.
How am I compensated for on-going investment advice?
I am paid a flat fee for each of the portfolios that I manage for you regardless of how much money you have invested. Under this compensation method I have no financial incentive to recommend trades unless those trades will add value to you. The fee is deducted from your portfolio by the trustee and remitted to me through my dealership much the same way as it is under the commission model but the fee is shown separately on your statement.
What are your fees?
My fees are calculated based on my assessment of your portfolios such that the first, and largest, portfolio would be charged $100.00 per month and the second and subsequent portfolios are charged $50.00 per month. RESP’s and smaller portfolios may not incur a charge at all as long as there are larger ones that are under the FEE-ONLY platform.
I have been thinking about this for quite some time because I have been frustrated with the deferred sales structure that is still common in the industry. This system requires the constant search for the next sale resulting in (hopefully) a large pay cheque. A sale of a mutual fund under this system would pay me 5% of the amount invested plus an on-going service fee, so an investor with $100,000 would pay me $5,000 to draw up the paperwork while an investor with $10,000 would only pay me $500. I consider this to be unfair since I am essentially doing the same work in preparing a portfolio or simply adding to an existing one.
- F-class mutual funds were first introduced in 1999 but most fund companies were slow to add them to their roster. As of June 2007 there were over 1100 funds available in F-class and companies were getting even more aggressive in their price reductions with some reducing MER’s by 1.5%. For example; Fidelity Monthly Income Fund series A has a MER of 2.35% while the series F version (same fund) has a MER of .95% and as you would expect the returns are also 1.4% higher for the series F version.
- Many mutual fund dealers would not approve Fee-based advisors since the lack of a commission would greatly reduce the amount of income to the firm. This would eventually be offset by the amount of on-going fees earned over time by the Fee-Based advisor but only after the complete transition of a substantial number of clients.
- Many clients did not understand the way their advisor was paid since the compensation was embedded in the fund fees and they had the perception that they were not paying for advice … the fund company was. The regulators fought to have this perception cleared up but it was an uphill battle and now, with more media scrutiny, investors are asking better questions of their advisors and are more aware of what it costs to invest.