Revealed: the lowdown on adviser fees

It's not enough to know how much you're paying in fees to your adviser.

You can't really tell if you're getting value for the buck unless you know what everyone else is paying, too. So let's find out what the going price of having an adviser is for investors with accounts of various types and sizes.

Our guide to the latest fee trends is the software firm PriceMetrix Inc., which collects data in the advisory business and uses it to help advisers run their businesses more profitably. For this column, PriceMetrix has made available fee data drawn from a survey of 10 Canadian firms that include both large and medium players with as few as 150 advisers on staff.

Let's use a $100,000 account as a quick point of comparison. In cases where advisers are paid through commissions associated with mutual funds and other products, the average fee is 0.9 per cent. With fee-based accounts, where the cost is set as a percentage of the client's assets, the average charge is 1.61 per cent.

High net worth clients pay much less in all situations. With an account of $1-million or more, the average cost of a fee-based account falls to 0.93 per cent and the average commission-based account drops to 0.66 per cent. With less than $50,000, clients are on average paying a hefty 1.9 per cent in fee-based accounts and 1.02 per cent in commission-based accounts.

PriceMetrix gathers this data in order to help advisers decide how much to charge for their time. Never forget: Selling investments and providing investment advice is a business. Advisers have to pay their staff and cover overhead costs like rent, marketing, licensing and administration. There has to be enough left over to make a living, or no one would work in the advice business.

Understand this as a client, and then stand up for your own interests by seeking a fair price for the services provided by an adviser. The average fee data presented here will help you with this, but there's more to the analysis than pure pricing. You also have to consider what services your adviser provides.

Here, I'm sure to run into trouble with investor advocates who object to my use of the term "adviser." They argue that too many advisers are just investment sales people who don't provide advice. The advocates have a point. So in assessing the value you're getting for the fees you're paying, ask yourself whether your adviser has:

-Discussed your broad financial situation in detail and produced a financial plan that maps a route from where you are now to where you want to be later on in life.

-Evaluated how financially set you are for retirement.

-Given some attention to how you'll afford to put your kids through college or university.

-Looked at and addressed your debt level and tax situation.

-Made ongoing adjustments to your plan to reflect your changing life.

Patrick Kennedy, vice-president of product and client management at PriceMetrix, said advisers who prefer fee-based accounts tend to put more emphasis on advice, and this is reflected in the fee premium over commission-based accounts. Certainly, fee-based accounts are more lucrative to the financial industry. PriceMetrix data shows that fee-based accounts have 26 per cent of the assets, but generate 43 per cent of the revenue for advice firms.

Has your adviser suggested a fee-based account instead of you paying commissions? If so, ask how the bottom line amount of fees will change. "If it turns out the rate is higher with a fee-based account, ask the adviser what the additional services are," Mr. Kennedy said. "It's entirely fair to ask that."

While the number of fee-based accounts is growing, most investors still have a commission-based relationship with their adviser. Here, the adviser's fees are either paid as commissions on stock trades or, more commonly, they're buried in the cost of owning mutual funds. If you own the typical equity mutual fund, a full percentage point of the management expense ratio is split by your adviser and her firm ( that explains how this works).

The PriceMetrix data show advisers who work on a commission basis are not as well paid as fee-based advisers. But that doesn't mean you should expect little or no advice. Without it, you might as well move to an online broker, where you make your own decisions and cut your fees to the minimum. In fact, some online brokers now let clients trade a limited selection of exchange-traded funds at no cost (read more ).

The PriceMetrix data suggest investors shouldn't consider a fee-based account with assets of less than $100,000. Below that level, the average 1.9-per-cent fee is prohibitively expensive unless you get the most comprehensive advice imaginable. With a small account, the chances of that are close to nil.

If you have a large account, say $250,000 or more, verify that you're paying lower fees than clients with smaller accounts. If you like your adviser, ask whether consolidating accounts held elsewhere with him or her would get you a fee cut.

One additional point to remember when looking at adviser fees is that there will in most cases be additional ownership costs associated with investments. In a fee-based account, you might pay an additional 0.5 of a percentage point on average for a portfolio of exchange-traded funds. With mutual funds, you should expect additional fees of at least one percentage point on average.

Credit the choppy stock markets of the past couple of years for a modest downward trend in the price of having an adviser. Mr. Kennedy said some advisers are prone to cutting fees when investment returns are poor. "We call that sympathy pricing."

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How do my fees compare?

Here's a survey of average fees drawn from 10 larger and medium-sized advisory firms in Canada. The data was compiled by the firm PriceMetrix Inc. Fees are shown here as a percentage of the size of a client's account on an annual basis.

Notes:

-In commission-based accounts, clients pay their advisers through commissions associated with investments. The fees shown here represent all commissions as a percentage of account size. Commissions may be paid upfront, or be buried in the cost of owning investments.

-In fee-based accounts, clients pay a set percentage of the value of their portfolio.

-Household size refers to assets with the firms that were surveyed to compile this data.

SOURCE: PriceMetrix Inc. Figures as of Dec. 31, 2011

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