7.4.5 Fees and costs

How advisors get paid

Financial advisors are paid in different ways, such as:

• Service fees: Advisors may be paid by an hourly fee, a transaction fee or a portfolio fee (a percentage based on the value of your investments, which may include a minimum number of transactions—generally for larger portfolios).
• Sales fees and commissions: Some advisors are paid for each transaction or by commissions. Commissions may be built into the price of an investment. They may be charged directly and they are a percentage of the total invested.
• Salaries: Some advisors are paid a salary. They usually work for a bank, credit union, caisse populaire or trust company. Their costs are built into the price of the investment or the service you are using.

Whether they are paid by fees, commissions or salaries, most advisors must try to give good advice based on understanding, trust and a code of conduct. You should know how your advisor is being paid and then you can evaluate her or his advice in the light of your own circumstances and goals. You should feel sure that any advisor is helping you reach your goals.

Costs

Management fees

Some investments, such as mutual funds, pay management fees to professional managers, based on a percentage of the value of the fund. The fees pay for the research and trading for the fund. Where less management is involved, as with funds that are based on a standard stock market mix or index, the management fee is usually lower.

The fees vary, but are often one to five percent of the fund's value, whether or not the fund makes money. Some mutual funds are made up of other mutual funds, so they may pay management fees to a variety of managers.

Sales fees

You may also pay sales fees for some investments, such as mutual funds. "Front-end fees" (FE) may be charged when you buy the investment. "Back-end fees" or deferred sales charges (DSC) may be charged when you sell. The fund may agree not to charge the fee if you hold on to the investment for a period of time, often three to five years.

Fees and costs reduce your return

These various fees and costs reduce the return you make on your investment.

Example: If you invest $10,000 in a mutual fund that makes an average return of five percent per year, you earn $6,288 after 10 years. However, if the fund manager charges a fee of 3.5 percent per year, the manager will keep $3,444, leaving you with a net profit of $2,844, a real return of 2.8 percent per year.

Ask about the full cost and what your actual return is after the fees and other costs.

The advisor may earn a commission from the product he or she recommends that you buy, and may earn more on some products than others. Therefore, ask what the various investment options are so you are able to make informed decisions when you buy investment products.

To calculate the return after management fees of actual mutual funds selling in Canada, go to the Mutual fund fee calculator from the Ontario Securities Commission. If you own mutual funds or are thinking about buying them, enter the information about your own investments to see how fees affect your returns.