Investment Basics
41 The Cost of Investing
Anne Lee
There’s a common myth that investing is only for the ‘rich’, and the common employed individual cannot invest. However, anyone with a pension plan probably has an investment portfolio that is managed by plan administrators. There are primarily three types of investment accounts that financial brokers offer. These different types are based on the amount of direction and control you may want for investment decisions.
Managed portfolios
- Full-service brokerage accounts have managers that help and assist individuals invest towards their retirement goals. These financial brokers usually charge approximately 1.5%-2.5% of management fees each year based on net value of assets in the account. If have a significant account base (greater than $1 million), management fees usually drop to 1%.
Even though 1.5% per annum of management fees may not be too significant as one starts to build wealth, on a $2 million dollar portfolio the costs of management fees would be growing steadily every year to $30,000 ($2M x 1.5%). Note that these management fee costs would be charged each year when your investment portfolio does well as well as when the portfolio suffers a weak year. These fees over time can significantly cost hundreds of thousands of dollars out of people’s gains.
Robo-advisors
- Robo-advisor investment portfolios have come about with a number of online trading platforms in Canada. These accounts will usually charge less than managed portfolio accounts (approximately 0.5% – 1.0%) and will base investment decisions on your level of risk and growth that you indicate upfront. These risk levels can be changed as your retirement goals change. The robo-advisor would actually make investment decisions on your behalf, and almost always have a significant portfolio of ETFs. This type of portfolio management is good for investors who are not ready to be totally hands-on with their investing decisions, but also don’t require and understand how to utilize the full services of fund managers.
Self-directed accounts
Self-directed accounts would have the investor having full control of the investment portfolio. You are able to initiate trades, contributions, and rebalancing of the investments at any time. There is usually no investment advisor or investment manager attached to your account who can provide investment advice at a given time. However, the fees for having a self-directed account is very minimal and usually only tied to having a below minimum threshold balance in the account or the cost to purchase stocks/ETFs. If you are going to keep your investment strategy on the simple end (eg. contributing regularly and purchasing broad-based index funds or ETFs), then a self-directed investment account may be the best option.