My Truth - Why Fees Matter
Most people who have visited my site or watched any of my videos know that I started K4 Financial because I had to make a choice between staying at my old firm and continuing to perform Stand-up Comedy.
However, that's only part of the story and today I am going to talk about the exact moment that I knew I had to start my own firm. It was sort of a perfect storm of events and it was a moment that changed my trajectory in life.
At the exact same time as this thing was happening at my firm with the comedy a couple of other things were on my mind.
- My Granddad had recently passed away and left me with an inheritance. My wife and I were discussing what to do with this money.
- Companies, like WealthSimple, were really starting to grab my attention, because they were offering great investment products and developing great portfolios at a fraction of the cost of what traditional banks and financial institutions were offering.
The Shower - In your best interest try not to picture me in the shower
I always do my best thinking in the shower, driving or mowing the lawn and I will remember this moment I had in the shower in 2016 for the rest of my life. One of the options we were obviously discussing was for us to invest the inheritance for our future and since I was a Financial Planner, I was obviously my own client and I was going to sell myself these investments.
That's when something terrible, but absolutely great occurred to me. This was my Eureka moment. I realized that even if I sold myself this investment product and made a commission off of myself, that I would be better off if I invested it somewhere else, like WealthSimple.
The fee savings I would have made would have ultimately put us in a way better financial position than if I would have invested at my own firm, even if I accounted for the fact that I made money off of myself.
How could I possibly continue to work at a place where I had to sell products I didn't want to purchase myself??
I couldn't, so that was the day K4 was born.
Now you might be asking what firm this was, and some of you may know, but that doesn't matter, because this truth would have been the same regardless of where I worked. I could have gone to another firm, even one that had typically lower fees than the one I worked at and it still would have been the same.
The only way it wouldn't have made that big of a difference would have been if I decided to work at a brokerage and be a portfolio manager for high-net worth clients. I never wanted to be anything but a Financial Planner and I wanted to be a Financial Planner for any and all Canadians who wanted my advice, which isn't possible when you work as a broker. Their fees are lower, because they have less clients with more money than typical advisors.
So, here is the math that shows the actual difference in fees.
For the purposes of simplicity, I am going to pretend we got an inheritance of $100,000, which wasn't the case, but it just makes my math easier for you to understand.
The fund I was going to buy had a fee of 2.88%, which is quite high, but it was the Aggressive Portfolio I wanted and aggressive portfolios usually have higher fees.
This means, my firm would have been charging me $2,880/year for my investment.
How much would I have made?
At that time, I would have sold myself a DSC fund and immediately been paid 3.3%, or $3,300 and on top of that, I would have made 0.24% on the account value every year, so another $240/year. If it grows, I get paid more, if it goes down, I get paid less.
But, at that exact time, I knew I could have just invested that money myself at WealthSimple and paid a fee of 0.70%, or $700/year.
That's a savings to me of $2,180/year, so it obviously doesn't take very long for me to make up for the loss of commission. It's not in my jeans now, which kind of sucks, but I would have a lot more in my jeans later.
Now, these firms will tell you that they charge this high fee because you are getting advice and you have to pay for advice.
That is 100% true and I am a huge believer in good financial planning advice. There is a value to it and in some cases, the value to clients is immeasurably large.
However, there are a lot of people who aren't getting advice and are only being sold products. Less than 20% of "Advisors" in Canada are CERTIFIED FINANCIAL PLANNER Professionals and a whole lot of them don't really know what they're talking about. Their advice isn't worth anything and sometimes it's even detrimental.
But, what if I could do both??
I could charge my own fee to provide the advice, support and guidance and still allow my clients to invest in great portfolios at a much lower cost.
So, if you invest with me, then your fee would go up to 1.15%, but you would get a clear, easy to read Financial Plan. A complete breakdown of my recommendations, including how much you would pay in total and how much I would be paid, and ongoing support from a guy who cares more about the best interests of all Canadians rather than if my name is up on the top of some sales board.
$100,000 at 2.88% versus 1.15% for 20 years
First, let's just look at the fees savings. If you can drop your fees by 1.73% on $100,000, that should mean that you have a savings of $1,730/year, but then you'll also have a savings on the savings in the next year.
So, after 20 years, this person would save, $40,923.
Now, let's look at the even bigger picture.
If you haven't watched it, you should watch my video entitled, What to Expect - Rates of Return.
If you don't want to watch it, it says that there is an entity called the Financial Planning Standards Council (FPSC), and they put out a notice to financial planners that told us what Rates of Return to show as projections to our clients.
This doesn't mean that's what will happen, but it does mean a few things. One, if your guy is telling you something other than this, ask him why. Especially if he's saying you'll get 8, 9 or 10 percent, because that's just him making shit up to make himself look better and convince you to buy from him. He's showing you that he got that before, so he can show it again. That's like me telling you that you'll get 20%, because some people got returns around that range last year.
Second, it clearly states that we are supposed to take the projected returns they are showing and then reduce the fee the client pays off of that number.
Which means, that in the case above where I said I would invest in an aggressive portfolio, then I could expect a long-term rate of return of about 6.65%, minus the fees.
So, at K4, I could project a return of 5.5% (6.65% - 1.15%) and at the other firm, I could project a return of 3.77% (6.65% - 2.88%).
I'm not just making this up, this is actually what we're supposed to show and I can almost guarantee that your guy isn't projecting that you'll get a return below 4.0% if you're invested in an aggressive manner, but that's what he should be showing.
So, what's the difference now?
$100,000 growing at 5.5% for 20 years
$100,000 growing at 3.77% for 20 years
That's a difference of $82,153.
I guess that's about it for now. I just want you to focus on what you're paying and I want you to decide if it's worth it. If you like your guy and he's honest and upfront and you like paying for his advice, that's great. But, if you don't, then you're paying a whole lot of money for nothing and you should research some alternative options, because they are out there and your future could depend on it.