By Scott Ronalds

Investment fees reduce returns. This much is obvious. What isn’t so clear, however, is what constitutes reasonable fees. A number of variables play a role, such as whether you work with a full-service advisor, follow an active or passive (indexing) investing style, and what the size of your portfolio is.

Unlike the capital markets, which are volatile and unpredictable, fees are completely within your control. You want to make sure, therefore, that you’re receiving value for your money.

We’ve endeavoured to provide a guide – The Fee Tree – that outlines the range of fees Canadian investors should reasonably expect to pay, taking into consideration the above variables. Our analysis focuses on a balanced portfolio.

At the low end of the spectrum, if you’re a do-it-yourself investor and manage your own basket of securities, you should expect to pay $10/trade (or less). This is great value, but you’re on your own and this strategy can be time-consuming (research, monitoring, etc.). DIY investors who hold a portfolio of exchange-traded funds (ETFs) should expect to pay 0.3% - 0.5% (per year).

If you want advice managing your investments, you’re moving to the next branch. A low-fee option is purchasing funds directly with an independent, no-load fund company that does not pay trailing commissions (ongoing compensation paid to a third party). These companies offer their own family of funds and provide investment advice in helping you build a portfolio suitable for your particular situation. Steadyhand, Mawer, and Leith Wheeler are examples of such companies. You should expect to pay 1% - 1.5%, although the fee may drop depending on your portfolio’s size.

If you’re looking for full-service advice, which should include investments, tax, estate, and retirement planning, you should expect to pay for the full array of services offered (so make sure you need and are receiving them!). If your portfolio is under $500,000 and you work with an advisor or broker, expect to pay 2% - 2.5%. This is the highest level of fees you should pay for investment management. If your portfolio is larger (>$1 million) you should expect lower fees (see Fee Tree). Likewise, if your advisor advocates an indexing strategy, you should expect to pay lower fees. (While not the purpose of this piece, there are tradeoffs between active management and indexing that should be carefully considered)

Investors who do not need ongoing full-service advice, but who want assistance building a financial plan, reviewing their portfolio, or planning for retirement, may choose to work with a fee-for-service planner (click here for a directory). These individuals charge a flat fee or hourly rate for their services, and can be a good fit for investors looking for lower fee products and periodic financial advice.

We encourage you to work your way down the branches to determine if you’re satisfied with the fees you’re paying. If not, maybe it’s time to shake the tree.

The Fee Tree (PDF)