The Globe & Mail’s Rob Carrick posed a question to his LinkedIn followers a few months ago asking about the cost of a financial plan. He quoted a reader who said:

“We recently received a quote of $4,000 for retirement and investment planning. This is a one time fee for service engagement. Seems high – is this the average cost now? And any guidance on what the report should include?”

There were some interesting responses from financial planners across Canada. Many claimed the $4,000 fee was well below what they would charge for a similar service. A few others said they charged less than $1,000 for this type of plan. 

The trouble is that from the client’s perspective most feel their situation is fairly straightforward and they think they just need some expert guidance to make sure they’re on track. From the financial planner’s perspective there may be any number of complications that would require much more careful analysis and planning, like whether the client is a business owner, are they a US citizen, has their relationship status changed, do they have stock options, a rental property, own property in the US or abroad, etc.

Some of the planners commenting on Rob’s question work exclusively with ultra-high net worth individuals. These folks tend to have much more complicated and robust planning needs. A $10,000+ fee might be reasonable given the amount of wealth and complexities they’re dealing with, not to mention the benefit of getting the planner’s own expertise and the expertise of the team around them.

For those with truly basic planning needs a fee of $4,000 might be too high, but a cookie-cutter plan for less than $1,000 without much detail or ongoing advice might not cut it.

Rob took that feedback and more to write a follow up piece on how much you should expect to pay for a financial plan that shows you’re on track for retirement (and more). The answer was a range between $1,500 and $4,000, or higher.

Fee-only advice is still a fairly new and unknown business model in Canada, so we shouldn’t be surprised that planners and clients have vastly different expectations on how much to charge or pay for a plan. 

Michael Kitces has done extensive research on planning fees and found that the median flat-fee price for a financial plan was $2,400 (US based research).

One of the challenges I’ve faced in my own fee-only financial planning practice is aligning the service I provide with the right type of clients who I feel will get value from that service. This includes charging a reasonable fee for the written plan and 12 month long engagement (currently $1,800).

My ideal clients are regular Canadians with regular planning needs. In most cases they are nearing retirement and want to know the answers to burning questions like are they on track to retire, how much can they spend, and how best to generate retirement income from their investments. Other clients may have recently gone through a major life event such as getting married, having their first child, moving into a new house, or changing careers, and want to know how to get their finances to match their new reality so they can achieve their goals. 

After an initial inquiry or discovery call we may find that the prospective client’s needs are much more complicated and don’t quite fit with the service I provide. In this case I would refer them to a larger fee-only financial planning firm like Objective Financial Partners or Spring Plans, where they have entire teams with expertise in certain areas of planning. Again, don’t be surprised to see that advanced financial planning may cost in the neighbourhood of $7,500+.

There are only 100 or so financial planners who are truly offering unbiased and objective advice for a flat fee. Each of them likely have a particular expertise and a ‘type’ of client they like to work with. That’s why there’s such a wide range of fees being charged across the industry.

One thing for prospective clients to watch out for is that several fee-based advisors (who charge a flat fee or percentage of assets to manage your investments) have co-opted the term “fee-only” or “advice-only”. They may offer a financial plan but what they’re really after is for you to invest your assets with them. 

It’s hard to pinpoint exactly how much value you could get from using a fee-only financial advisor. One answer is to measure the investment fees saved if you end up moving from a managed portfolio of mutual funds to a robo-advisor or self-managed portfolio. The difference in fees could easily be $10,000 per year or more. But how do you quantify the confidence that you’re on track to retire, or the increased financial literacy, or the help in defining and prioritizing your financial goals? 

When I first started offering this service I wasn’t sure how receptive people would be to paying upfront for financial advice. After all, the financial services industry typically bundles advice with product sales and so the fees come off of your investments not directly out of your pocket. But it’s clear the fee-only business model has been growing by leaps and bounds in the past few years. More and more people are realizing that there’s real value in financial planning and not so much in their advisor’s stock picking prowess.

We need to continue to bring more awareness to the fee-only financial planning model. For the advisors offering this type of service we need to be open and transparent about our fees and level of service provided so that prospective clients know where to turn for their situation.

This Week’s Recap:

No new posts from me over the past two weeks as we are in vacation mode and getting ready to head to Vancouver / Whistler for a short getaway. Our kids have been enjoying a variety of activities this summer including theatre camp, science camp, and volleyball camp. It has been nice to have a fairly normal summer so far. 

I’ve enjoyed a new podcast from Ramit Sethi called I Will Teach You To Be Rich. Ramit looks at real money stories from behind closed doors. The first episode was about a husband not trusting his wife to run her business (while he traded cryptocurrency as a “business”). The second episode was about a cheap couple who was worth more than $1M. And the third episode is about a husband going broke trying to pay for everything and be the “man of the house”.

From the archives: Stop asking $3 questions. Start asking $30,000 questions.

Weekend Reading:

Our friends at Credit Card Genius have the best credit card offers and sign-up bonuses for the month of August.

Should you always defer CPP if you’re working past age 65? Not always, explains Alexandra Macqueen.

Here’s the most important retirement planning question you need to answer:

“Are you retiring to something, or from something?

On a similar note, here’s Joe Kesler on The Humbler Dollar blog with a look at life’s two halves.

Of Dollars and Data blogger Nick Magguilli looks at the Coast FIRE movement where you go big, then stop. Here’s my own path to Coast FIRE.

Here’s a nice interview with My Own Advisor Mark Seed on the Modern FImily blog. 

Gen Y Money has an in-depth look at how dividends are taxed in Canada.

Preet Banerjee has partnered with BMO InvestorLine with two free courses to learn more about investing. Here’s the introductory video:

The latest investing fad: direct indexing. Morningstar explains what exactly it is, including the pros and cons of this investing strategy.

Everyone wants to talk about inflation these days. Here’s why investors should consider long-term trends, not pandemic ones.

Steadyhand’s Tom Bradley looks at the rise of free trading apps as an eco-system of failure.

What’s a better investment – real estate or stocks? Millionaire Teacher Andrew Hallam gives a thoughtful answer to this question.

Have a great weekend, everyone!

For many Canadians, owning a home is a sign of personal and financial success – a rite of passage signalling that you’ve made it on your own (maybe with some help from mom & dad). Just over two-thirds of Canadian households own their home, which puts us ahead of countries like the United States, Australia, and France, but well below the likes of Italy, Spain, and Norway.

Soaring real estate prices across the country have kept housing top of mind. Ask any journalist or blogger what the most-read stories are and they’ll invariably say anything to do with housing.

I must admit I don’t quite get the obsession. Maybe it’s because I can be an emotionless robot when it comes to financial decision making. Or because I live far away from the major Canadian cities where real estate has exploded in value. Here in Lethbridge, our housing market barely keeps pace with inflation.

Or maybe it’s because, as Canada’s worst handyman, I’m keenly aware of the constant maintenance and upkeep that comes with owning a home. We moved into our current home – a brand new build – 10 years ago. In that time we’ve had to deal with an insurance claim for major roof and siding damage, plus landscaping projects, plumbing issues, appliances breaking down, a basement renovation, and an ant colony from hell, just to name a few. Yeah, home ownership sucks.

That’s why this piece from friend-of-the-blog Kyle Prevost resonated with me. Kyle moved to Doha, Qatar last summer to teach at an international school. Now he’s decided to sell his home in rural Manitoba. This quote nicely sums up my feelings around home ownership:

“Endless fear of hearing a strange noise. Is that the furnace taking its last breath? Perhaps it’s the water treatment system deciding to spring a leak? Is that rain I hear – is it possible our septic system is backing up?!”

I acknowledge that I’m saying this from the privilege of being a long-time home owner (~20 years). I live in a low cost of living area and so it’s hard to put myself in the shoes of someone looking to buy a house today in a city where prices have increased by 30% or more year-over-year. The average home price in Lethbridge ($319,503) is less than half the average home price in Canada ($679,051). That’s insane.

We have serious housing affordability issues in many areas of the country where the answers seem to be:

1. Rent forever
2. Get a significant cash gift from relatives
3. Move to a lower cost of living area

The last two just aren’t options for many aspiring home owners.

That’s why we need to destigmatize renting in this country. Renting doesn’t mean you’re a financial failure. In many cases it’s the smart financial decision. Renting is often cheaper, comes with fewer headaches, and gives you flexibility to relocate or travel for extended periods. 

Meanwhile, home ownership isn’t all that it’s cracked up to be. Condo owners pay monthly fees and also may be hit with special assessments from time-to-time. Detached home owners have to deal with all the crap I’ve mentioned above, with maintenance costs easily surpassing 1% of property value each year over the long term.

This Week’s Recap:

I recorded an interview with Kyle Prevost on investing FOMO for this year’s Canadian Financial Summit. The annual online financial conference should go live later this fall. I’ll keep you posted.

I’ll also be chatting with Kornel Szrejber this week about pensions on the Build Wealth Canada podcast. Stay tuned for that conversation.

On Monday I looked at the Vanguard effect on mutual funds, fees and performance.

On Thursday I dove further into the mutual space and revealed the dirty little secret of the industry – closet indexing. 

From the archives: Here’s Ben Felix on renting in retirement.

Promo of the Week:

Here’s the biggest no-brainer move to make with your money right now. The big banks pay nothing on your savings deposits. EQ Bank’s Savings Plus Account consistently offers an everyday high interest rate at or near the top of the market (currently 1.25%). Open an account here and earn up to 125x more than other banks without fees or hassles. That’s right, no monthly fees, plus free e-Transfers and free bill payments.

Weekend Reading:

Our friends at Credit Card Genius have done the math to determine which Canadian rewards program is worth the most in categories like North American flights, long haul flights, free hotel stays, and groceries and gas.

Global News’ Erica Alini explains why some used cars are now selling for as much as new models.

The Humble Dollar’s Jonathan Clements debunks six playground taunts seen often on financial forums and blogs.

Downtown Josh Brown says your mission is to invest for the long-term. The world will offer you a million chances to fail that mission.

Morgan Housel explains why the highest forms of wealth are measured differently:

Keep two things in mind:

Desiring money beyond what you need to be happy is just an accounting hobby.

How much money people need to be happy is driven more by expectations than income.

Here’s Nick Magguilli on how investing has evolved from something only done by the rich and powerful to something done by everyday people.

PWL Capital’s Ben Felix explains the 5% rule when contemplating renting versus buying a home:

Jamie Golombek looks at a recent case involving a Vancouver taxpayer who purchased, demolished, constructed and then sold three homes in a six-year period.

Louise Cooper explains why women in particular have their work cut out when it comes to funding their retirement, but are generally better at investing than men are.

Preet Banerjee went off the record with Peter Mansbridge for his 100th (and possibly final) episode of the Mostly Money podcast. It was a good one!

A Wealth of Common Sense blogger Ben Carlson explains why hedging inflation is harder than it sounds:

“Markets always require context but the biggest lesson here is how hard it can be to hedge against short-term risks in the markets.”

Squawkfox blogger Kerry Taylor, who lives near Vernon, BC, describes her evacuation plan as wildfires rage nearby.

Finally, why waiting for baby boomers to die is not effective housing policy.

Enjoy the rest of the weekend, everyone!

For years I’ve railed against Canada’s mutual fund industry for high fees, conflicts of interest, underperformance, poor disclosure, and lack of accountability. But today I’m going to zero-in on another major problem with mutual funds in Canada – closet indexing.

Canadian equity mutual funds sold by Canada’s big banks, in particular, are some of the biggest offenders. The CIBC Canadian Equity Fund (CIB479) closely resembles the S&P/TSX 60 Index – a fund made up of Canada’s largest companies. The fund does not attempt to differentiate itself from the index, yet it charges a management expense ratio (MER) of 2.20%.

The 10-year performance of the S&P/TSX 60 Index is pretty solid with an annual average return of 7.97% (June 30, 2021). A passively managed Canadian equity ETF like iShares’ XIU with an MER of 0.18% returned 7.80% per year over 10 years.

But CIBC’s Canadian Equity Fund returns have been abysmal by comparison, at just 5.70% per year for the decade.

Is that surprising? It shouldn’t be. A fund that makes no meaningful attempt to differentiate from the index stands no chance of beating its benchmark. It makes an already difficult task (beating the market) impossible. Add a grossly expensive 2.20% MER and you have a closet indexing laggard.

CIBC’s fund is a bit player in the market, with assets under management of around $595 million. By comparison, TD’s Canadian Equity Fund manages $5.8 billion in assets. It’s a cash cow for TD and its advisors, charging a similarly outrageous 2.19% MER.

The fund holds 60 large-cap Canadian companies and once again makes no real attempt to stand out from the broader Canadian index. The result? An annual return of just 5.30% over the same 10-year period.

Canada’s Closet Indexing Problem

“If you deliver index-like returns, you should charge index-fund-like fees.”

That’s what American researchers concluded in 2015 when they revealed that the Canadian mutual fund industry is the world leader in closet indexing. Estimates showed that about 37% of the assets in equity mutual funds sold in Canada are in closet index funds.

The key takeaway here is that if your portfolio is made up of mutual funds sold to you by your bank advisor, it’s highly likely that they’re closet index funds. Closet indexing means you’re paying higher fees than necessary while getting less than your fair share of market returns.

Not all mutual funds are bad, however. Index mutual funds, for example, track a broad stock index such as the TSX or S&P 500. Returns mimic the stock market index, or benchmark, that the fund tracks, minus a small management fee. On the flip side, some mutual funds attempt to beat returns from a broader stock market index by taking a more active role in selecting stocks and timing the market.

Related: The Vanguard Effect On Mutual Funds, Fees, and Performance

Firms such as Mawer have had a successful long-term track record in large part because their holdings differentiate from the index that it’s trying to beat. Mawer’s Canadian Equity Fund (MAW106) has delivered returns of 9.50% annually over the last decade, compared to the S&P/TSX Composite Index, which returned 7.97% over the same period.

The jury is out as to whether Mawer can continue this outperformance into the future, but the company has two things going in its favour.

For one, Mawer charges relatively small fees for its mutual funds. The Canadian equity fund, which manages $823 million in assets, charges 1.17% MER, which is more than a full percentage point lower than what the closet indexing big bank mutual funds charge.

The second advantage Mawer has over the big banks is that its funds tend to have a high active share, an indicator which measures how much a fund’s portfolio deviates from its benchmark.

A fund with an active share of 0 is identical to the underlying index (i.e. a closet indexer), whereas a fund with an active share of 100 has nothing in common with the index.

In Mawer’s Canadian Equity Fund you’ll find the usual suspects such as Shopify, RBC and TD, Telus, CP and CN Rail. But the fund is limited to 46 holdings instead of 60-62, and within it you’ll also find smaller firms like Ritchie Bros, Stella-Jones, and Richelieu Hardware, to name a few.

These smaller, more concentrated bets help differentiate Mawer’s fund from the big banks’ closet indexing funds. 

Note that a passive investing approach is significantly more likely to deliver better and more reliable returns over the long term. A past successful track record is no guarantee of future success. The point is if you want to bet on the very small chance of outperforming the market then you’ll need to avoid a closet index fund and choose something that is different than the index.

Final thoughts

Canadian investors pay too much and get too little in return. Closet indexing is one of the main reasons why. All of the banks have index mutual funds in their line-up, but your advisor has little incentive to even mention them to you. That’s because it’s “suitable” to sell you a higher fee closet index fund, even though it’s in your best interest to pay less and get better returns.

DIY investors have more options. Index ETFs track the broader stock market and most charge even less than the cheapest index mutual funds. Stock pickers can follow a dividend growth or value strategy to mimic their own Mawer fund, minus the management fee.

The bottom line is that if you discover your portfolio is filled with nothing but closet indexing mutual funds, ask your advisor about a lower cost index fund solution, or switch to a robo-advisor that can manage a low-cost portfolio of index ETFs on the cheap.

Finally, if you’re comfortable enough to go it alone, open up a discount brokerage account and find an investing strategy that works for you.