BUSINESS

Investors need to understand the fees they pay their financial adviser: experts

05/12/2015 03:26 EDT | Updated 05/12/2016 05:59 EDT
OTTAWA - Investors may be more focused on the gains they've made in recent years than the fees they pay their financial adviser, but experts say they shouldn't be neglected.

David Larrabee, a director at the CFA Institute, said the stock market has had a good run since bottoming out during the financial crisis.

"When your portfolio is growing at 15, 20 per cent a year, one to two per cent in advisory fees may seem like a small price to pay," Larrabee said.

"But if instead your portfolio is only growing by four per cent, which could be our future, then all of a sudden those fees look pretty big."

Financial advisers generally fall into two broad groups: fee-based, which charge a set fee or sometimes percentage of the assets under management, and commission-based.

Fee-based advisers have gained in popularity in recent years with new low-cost online alternatives, while commission-based advisers have been criticized for their potential conflict of interest.

Larrabee said the choice depends on what you need from your planner and the services they offer.

"In both cases you can find good advice at a reasonable price, but also the flip side is in both cases you can be paying too much for that advice," Larrabee said.

He said the fee structure is as important as the adviser putting their client's interests ahead of their own.

"This is a higher standard of care than an adviser who simply commits to a standard of suitability," he said.

The disclosure rules for investment advisers are changing.

By the middle of next year, new requirements for annual performance reports and fee disclosure will take effect.

Starting July 15, 2016, advisers will be required to provide an annual report on charges and other compensation that shows, in dollars, what an adviser was paid for their services.

Cary List, president and chief executive of the Financial Planning Standards Council, said the key for investors is transparency on the part of the adviser about what they charge and whether they are fee-based or work on commission.

"Is the individual going to be able to demonstrate to you that they are going to put your interest ahead of their own and any other interest?" List said.

"Are they going to be able to demonstrate to you that they are going to mitigate any potential conflict of interest they have, not only from their compensation structure, but any other conflicts that may arise?"