Many people shop around to compare prices before big purchases to ensure they are getting the best deal possible. Understandably, in this economic environment people are more price-sensitive than ever.
When it comes to your portfolio, it is important to be fee-conscious, but value for your money should hold greater importance.
There are many financial professionals who say that fees only eat into your returns and should be reduced as much as possible. What they don't take into account is the type of management you would receive for the reduced fee. Remember that the money you save on fees can easily be lost in the stock market if you're not careful and have no risk management strategy. It's net returns (after fees) that matter most.
Many investors simply don't know what they are paying. It's not always easy to calculate your own fees let alone your own returns. Some advisers are not transparent with their costs and don't explain portfolio returns in great depth. The biggest issue I see is that investors of mutual funds really are unaware of any fees associated with their portfolio as the fees are buried within the funds.
I find most investors who come to me for help have no idea how much they are really paying and many are shocked to learn that their previous portfolios often had fees of 2.5 per cent per year or more. I encourage investors to know what they are paying and if unsure, ask their adviser to clarify. It's important to know your fees to ensure you are getting value for your money.
In order to really know if you received your money's worth, you need to compare your after-fee results to what you would have received from an alternative investment.
Depending on the asset allocation in your portfolio, various benchmarks could be used to compare your performance. For the sake of simplicity, if you have stock-based mutual funds or individual stocks in your portfolio then the TSX index would be used to evaluate the performance. The TSX was down 11 per cent last year and is down again in 2012. If you used a low-cost index fund or a buy-and-hold approach, it's likely your returns are similar. It hasn't been easy to make money in these markets, but it is possible and good managers have been able to provide clients with positive returns.
No investment manager is perfect but by minimizing losses in a bad year (there will always be good and bad years) you are well-positioned to achieve much better returns overall.
It is easy for investors to make money in a good market but it is much harder to maintain positive returns or to minimize losses when markets are negative. It is important to have a strategy that reduces your overall risk and you should always know what fees you are paying. Ultimately it is the value added that will help you know if the advice you are given is worth the price tag.
Lori Pinkowski is a portfolio manager and Senior Vice President at Raymond James. Website: www.pinkowski.ca.
