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Fees and commissions: How much of your money is actually being invested?

Fees and commissions: How much of your money is actually being invested?

One of the most common misconceptions of casual investors is that all of their money is, in fact, being invested. Sorry people, but that is not the case!

To at least some extent you, as an investor, have to pay in the form of fees and commissions to invest your money. Where is your money really going?

Many of the costs associated with investing are fairly well hidden because they are grouped with overall investment profits and losses. Think of the way that the costs of homeowner’s insurance and property taxes are typically combined with mortgage payments. Just as you don’t write a separate cheque for your homeowner’s insurance, you don’t ordinarily see the direct effects of footing the bill for investment fees as separate transactions. But that doesn’t mean that they aren’t there. Oh yes, they are definitely there.

The key principles involved in tracking the costs associated with investing are:

  • Do you use an investment advisor?
  • If you do use an advisor, what is his/her method of compensation?

Investment advisors

One of the first questions I always tell people to ask a financial advisor before you hire them is “How do you get paid?“. Asking that simple question will demonstrate how upfront that advisor is. If you don’t understand his explanation, it’s time to find a new advisor immediately.

When you choose to use an investment advisor of any kind, you are essentially paying for that person’s financial expertise to aid in guiding you to make good investment choices. In other words, the investment advisor is going to be paid, somehow.

Even if you don’t use an advisor and invest on your own with an online broker you will still incur a trading fee every time you purchase or sell a security. These trading fees are relatively small—usually in the neighborhood of $5-10 per stock trade—but the cost can add up quickly, particularly for someone with an extensive, active portfolio.

And, of course, without the services of an advisor, you’re on your own when it comes to investing. This is something that can be extremely intimidating, not to mention financially risky for casual, inexperienced investors. Even low risk investments require you to do your homework before handing over your money.

Fee systems for investment advisors

There are three basic systems of compensation for investment advisors:

  1. Flat rate per-hour charges: Using this method, an advisor is paid for the number of hours of research and work done to implement financial advice, based on a pre-determined per hour rate. These advisors are usually referred to as “fee-only advisors“. This approach has the benefit of objectivity; since the advisor doesn’t benefit personally from any particular investment and has no incentive to encourage active trading, he/she is more likely to consider a wider range of investment options and concentrate on a plan that best fits that of each individual investor in terms of available assets and comfort with risk-taking.
  2. Transaction-based commissions: This is the traditional form of investment advisor compensation and is used by essentially all the large investment firms. This method calls for the advisor to receive a commission every time an investment is bought or sold. The potential for conflicts of interest here are obvious, as the advisor has a clear incentive to push the client to constantly buy and sell, whether that is in his/her best interests or not. While “churning”—the process of trading for the sake of trading to earn commissions for the advisor—is technically illegal, it does happen and it’s very difficult to prove.
  3. Asset-based fees: With this form of compensation, the advisor earns a percentage fee based on the value of the investor’s account. By this method, the better the investor does, the more money the advisor makes. Giving the advisor every incentive to work for the investor’s best interests is the main attraction to this method. The only real potential downside is that the advisor also has an incentive to encourage the investor to place as many assets as possible at his/her disposal.

Know what you’re paying for

It’s worth the time it takes to check the “fine print” and determine where your investment money is going—not just the investments themselves, but the hidden fees and commissions as well. You’ll not only have a better sense of the actual expense of investing, but you may have some insight into your investment advisor’s motivations as well.


  1. krantcents

    In my case all of it! I won’t pay fees or commission. I go with low cost funds like Vanguard or Fidelity.

  2. Marc-Antoine Morin

    Asset-based fees…you forget one downside: the risk that the advisor will recommend products with higher commissions’ not necessarily in the client’s best interest.

    • Peters

      While technically true, asset based fees are usually broken up into equity, cash, fixed income and mutual funds. Mutual funds pay a trailer fee to any advisors whose clients hold the funds.. This is usually much much less than the MER. There are cases however that advisors double dip – taking the trailer but also charging a fee on mutual fund assets but some firms only allow F class funds to be held by clients, these funds don’t pay a trailer to the advisor and the MER is lower to reflect this.

      At the end of the day, even if you have an advisor, it’s up to the client that they make sure they keep abreast of their accounts and ASK their advisor if something doesn’t look right.

  3. Jordann @ My Alternate Life

    Based on your assessment, it sounds like a fee-only advisor is the way to go. There appear to be too many conflicts of interest to possibly receive good advice otherwise!

  4. niterainbow

    This was one of the primary reasons, why I quit several emerging market funds, as direct investment.

    Original notion that they would have a better insight. Even a market tracker funds had 2%+ fees, and any others up to 4%…no wonder no money could be made in such funds. It was a very expensive lesson.

  5. BruceMcK

    How many fee-only advisors will provide ongoing investment advice?

    I use a fee-only financial planner that created a detailed financial plan, and I pay hourly for occasional plan updates but it does not include investment advice or management. I do my own investing using an index based (couch potato) strategy. If I want investment advice and management, my advisor would want to move me to an assed based approach, using F-class mutual funds (no commission or trailers paid) plus an ongoing fee based on % of assets.

    For me the fee-only planner + self directed investing is the best approach, as it gets me comprehensive, unbiased advice I can trust, plus ultra-low cost investing.

    • Kathy

      Bruce , some fee only do give investment advice. Usually they are IIROC and use ETFS .
      I know several that will look at the asset allocation your financial planner has given you and quote a flat price per year to manage your money based on complexity and number of reviews required not a % of what you have.
      They are money managers, you have to go via a financial planner.

  6. Amanda

    At Member Savings Credit Union our Financial Advisor is paid strictly on salary therefore, not paid by selling any specific type or amount of investments. This is a huge bonus when working with a financial advisor as you want them to have your best interest in mind, not what makes them money for selling!

  7. Kathy Waite

    Good article with CRM2 just happening and new statement formats on their way to clients soon.
    Make sure you clearly see what you made before and after fees and how that compares to the market so you can see if you got value for your fees.
    Be wary of those representing a big dealer or company selling their own brand product all the time.
    Agree a flat fee , not a % related to the amount you have, or your fees will be forever increasing even if you are not more work.
    If You only want one appointment a year and have a sole RRSP why should you pay the same as someone with multiple accounts who wants a quarterly call?
    Many financial planners will undertake an advisor search and create a short list for you.
    Kathy Waite fee only financial planner.

  8. Don

    You couldn’t come up with even one conflict with the fee only model? How about simply overcharging? These Advisors often don’t belong to any regulatory bodies and have no Compliance department looking over their shoulder to make sure they’re dealing fairly and ethically. The method of compensation is immaterial. In the post CRM2 world, the consumer simply looks at their cost and decides if they’re getting value.

  9. Mr Home Maker

    Gosh, this makes me so mad. I learned this the hard way and made someone else wealthy. Lesson learned I guess.

  10. Pamela

    This was a good read. I like the way you have simplified complicated concepts so everyone can understand. I am only starting to do self-directed investing but if I every look for someone else to invest my money, this will be a great post for reference

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