Truth and transparency – part 3


August 17, 2017

As a boy growing up on a farm in rural Saskatchewan, a lot of sales representatives would show up at our door selling everything from life insurance and vacuum cleaners to encyclopedias. No matter who showed up, these sales reps had a certain determination to make the sale whether it was a correct fit for our family or not. The sales representative’s livelihood most often depended on making the sale. The first casualty of salesmanship is, almost always, the truth. In the interest of truth and transparency we offer you this series designed to clarify some common misconceptions about the investment industry.

Part 3 – Fees: Other hidden and embedded fees

As I pointed out in Part 2, there are many hidden fees in mutual funds and even GICs that the general public is not aware of. This issue will address some of the numerous programs offered by investment sales representative and wealth advisors:

Wrap accounts

These are popular programs that every large institution offers. A “wrap account” means they wrap together certain products and present it as a portfolio. Wrap accounts can look vastly different and can contain mutual funds, ETFs, GICs, stocks and bonds. On your account statement, it appears as if you own these securities but in reality you only own units of the “wrap account”. The fees for this type of investment will generally cost 2.0% to as much as 3.5%. This fee might be visible or it might be embedded. Always ask for the fee and whether it is embedded or transparent as well as if it is tax deductible.

Institutional segregated funds

Not to be confused with life insurance segregated funds, these portfolios are when you actually own the stocks and bonds, mutual funds and ETFs that you see on the statements, the opposite of a wrap accounts. These are generally more sophisticated and tailor made than the wrap accounts. The fees on these are generally the same and can range, but are almost always transparent and tax deductible.

Individual Discretionary Managed Portfolios

Discretionary portfolio management allows an advisor to manage money the same as a mutual fund manager. We have found that the fees vary for this service across the country but generally from 1.0% to 2.0%. The reason these fees are lower is to cut out the middleman. With wrap accounts and segregated accounts you have two mouths to feed, not just one. One is the advisor recommending the investment who then hands your money over to someone else to invest who also needs to get paid. A discretionary portfolio manager is both your contact and your money manager.

Bottom line:

1. There should never be the dreaded sales fee! That alone is worth a lot.
2. The fees in these three types of investments are usually tax deductible unlike mutual funds which are not. Regardless of the fee you pay, your decision on who you choose to help manage your wealth should be based on criteria, such as personal service, professional accreditation, investment process, investment philosophy, protection of capital and performance.

Knowledge is power: Look out for our next issue covering hidden fees on established and other financial products

At Cooper Schneider Financial, we believe it is important for all our clients to be informed and educated about the specifics of what they are buying and why they are buying it. In our next bulletin, we will wrap up our analysis on fees as we look at real estate debentures, exchange traded funds, life insurance segregated funds and principal protect notes.

If you missed any of the earlier issues in this series, just give us a call or email us and we will send them to you.

Daryl Cooper, Portfolio Manager, Scotia Wealth Management, 306-343-3255.
Colleen Schneider, Wealth Advisor, Scotia Wealth Management, 306-664-1860.