“An investment in knowledge pays the best interest.”
– Benjamin Franklin
Q&A with Mark Doyle, CFA
Q: Mark, are investment services worth the fees that investors pay every year?
A: It’s a good question. After all, Canada has the highest investment fees in the developed world. The US has the lowest fees. You need to find out whether your fees are too high, and whether the services you receive are appropriate.
Active management is very expensive – management fees, custody charges and sales loads often add up to 1.5% to 2.5% of assets each year. Let’s say you and your family have a $750,000 portfolio across RRSPs, TFSAs, and RESPs, and your annual fee is about 2% or $15,000 per year. That is a lot of money to shell out year after year without understanding much about it. What are you getting in return?
Take action: Spend the time to find out. It will likely be one of the most wealth-enhancing uses of your time that you will ever make. Don’t just ask your advisor to explain the fees. Read the fine print. Get a second opinion!
Once you know the fees in dollar terms (this makes it real), look closely at what you are getting for the fees you pay. Are retirement and tax planning advice included in the fee? This could be worth something – but not likely $15,000 every year.
Maybe you are happy with your portfolio returns because they have been improving. What if I told you that others with a similar asset mix did much better. Would you still be happy? Even if you performed better than most, how do you know if the fees are appropriate?
Understand benchmark returns and why they are important. Investment advisors are investing relative to benchmarks, whether they like it or not. When they tell you that they are not trying to beat benchmarks – that they are managing to your risk profile and protecting your portfolio against an uncertain future, do not take the bait. What is your advisor doing exactly to protect you and is that worth the price you are paying? Go back to the annual fee. What are you getting in return for your $15,000 each year?
If you are feeling that your funds are not performing the way you expect, you are not alone.
Investment advisors love to talk about all the interesting arrows in their quiver and the role that each play in your “financial solution”. These bells and whistles serve mainly to obscure a hidden fact – that most funds are overpriced and underperform their objectives by wide margins.
Q: What evidence do you have?
A: The evidence is clear – the vast majority of funds underperform over both short-term periods and long-term periods. The S&P Dow Jones 2018 mid-year SPIVA research report, compares the performance of professionally managed funds in Canada versus the stock market index benchmarks. Crucially, S&P Dow Jones adjusts for survivorship bias, unlike most comparative surveys. The percentage of equity funds that failed to beat their benchmark for the periods ending June 30, 2018, are as follows:
For example, over the last 10 years, 89% of Canadian equity funds failed to beat the S&P/TSX Composite Index. A whopping 98% of US equity funds failed to beat the S&P 500, and 95% of international equity funds failed to beat their respective benchmarks over 10 years.
Q: Thanks Mark! That was very helpful, but I gotta run – I need to find my past statements and do a little research. When can we meet again? I have more questions like: “what do I do next?”
A: I’m glad that has inspired you! I am always here when you need me.
 SPIVA Canada Scorecard Mid-Year 2018, S&P Dow Jones Indices, a Standard and Poors’ Company.
 Survivorship bias is the tendency to overestimate the performance of a representative group of managers. As funds close due to poor performance, for example, the data is dropped as terminated or merged funds do not have a continuous history of performance.
Mark Doyle, CFA
For assistance, please visit Marksman website or email me directly at firstname.lastname@example.org