Clients are more fee-sensitive today than ever before, due to generally disappointing investment returns. But lowering investment costs by lowering financial advisor fees can improve long-term investment performance. However, this proposition often puts advisors on the defensive because clients usually initiate such discussions. My advice is to be proactive and consider these suggestions to reduce client portfolio costs – without taking a big pay cut.
–Unbundle balanced funds
Balanced funds usually carry management expense ratios that are on par with the MERs of equity funds. With bond yields so low, however, MERs in the 2% range eat up most of the bonds’ gross pretax yield.
Looking at the biggest-load funds in the Canadian neutral balanced category, a simple two-fund combination to separate equity and bond exposure into two funds can save about 30 basis points in annual fees, yet keep advisor trailers steady.
If you use balanced funds to help your clients stay on track with their goals, there are terrific, well-priced balanced funds with MERs of 1.3%-1.8% that offer unitholders a big break on fees while still paying advisors well.
–Use cheaper active funds
In 1997, I began helping advisors restructure their new clients’ mutual fund portfolios. Typically, the three main goals were to simplify the portfolio, reduce costs and improve the product mix. My experience suggests that most mutual fund portfolios contain 30 bps to 40 bps in annual cost savings potential.
While the importance of fees varies by asset class, nowhere are fees more important than in bonds. That’s due to their low yields and limited outperformance potential. Fortunately, it’s easy to cut costs on bond funds without sacrificing portfolio manager quality or compensation.
–Blend active and passive strategies
For years, advisors licensed by the Mutual Fund Dealers Association of Canada had no access to passive or enhanced-index strategies in a prospectus-fund form that also includes reasonable compensation. That has changed over the past few years with the launch of funds from such firms as Bank of Montreal, Toronto-based Invesco Canada Ltd., and Oakville, Ont.-based Pro-Financial Asset Management Inc. These companies offer passive or enhanced indexing strategies with trailing commissions.
Equity and bond funds in this group are 30 bps to 80 bps cheaper than their traditional, actively managed, load fund peers. This suggests that certain funds have significant cost-saving potential. The best way to incorporate these funds is with core exposure to stocks and bonds.
–Offer “passive” portfolio models
Taking the blending strategy above one step further, you also could create all-index portfolio models for clients for whom cost is a major issue. The funds noted above can be used in this regard. Also, even though bank mutual funds are technically no-load, some bank index funds pay very competitive trailers.
This option is best suited to more planning-oriented advisors who lack either the interest or the time to spend on monitoring fund portfolio managers and fund companies. It also is appropriate for advisors who do a lot of financial planning.
Clients will generally benefit from any of the above cost-reduction strategies. And, if you take the initiative on this issue before your client asks, you just might enhance your clients’ trust in you by showing that you’re looking out for their best interests – and their bottom line. IE
Dan Hallett, CFA, CFP, is director, asset management, for Oakville, Ont.-based HighView Financial Group, which designs portfolio solutions for advisors, affluent families and institutions.
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