The Effect of Fees on Your Retirement

by Todd McLay

July 26, 2020

Fees have become a serious hot button topic in the financial Industry these days. Increased transparency has shed light on the wide variations in the fees financial advisors are charging their clients. At Precedence Wealth, we are firm believers in reasonable, clearly stated fee structures that allow all parties to benefit from successful wealth building.

Good financial advisors earn their fees through a comprehensive approach to financial planning that covers all areas of their clients’ situation. Many advisors, however, charge exorbitant fees and offer very little value to their clients. Here are just a few of the things you should not be paying your advisor for:

To Simply Sell Investment Products

Investments are easy to buy. Good advice is not. Your advisor should not be charging high fees just to sell you investment products.You are counting on their expertise, and your fees should also get you a detailed financial plan, specific tax advice, an insurance strategy and estate planning. And all of this should be in addition to effective investment management. The worst is when advisors sell only proprietary investment products from their particular bank or organization, severely limiting your investment options and overcharging you in the process.

To Mail Statements

Occasional statements should not be the way you learn about your portfolio. To truly earn their fees, an advisor should be providing a variety of communication and guidance. In today’s online world, you should expect tips, advice and useful financial content on a weekly basis, in addition to periodic contact to specifically discuss your portfolio.

To Underperform the Market

Studies have shown us that over 95% of all investment managers underperform the market on an ongoing basis. This is shocking in itself, but when you also consider that many of these financial “advisors” also charge fees as high as 2.5-3%, you really have to wonder what you’re paying for. Poor performance and high fees are a pretty awful combination.

At the very least, your portfolio should match market returns with either less risk or greater potential for high returns. And, to put it bluntly, if your advisor can’t accomplish this, then you are paying too much at any fee rate. Paying 3% is just salt in the wounds.

So now you know what you don’t want to pay for, and how much is too much. But what should you be paying, and what should you receive in exchange for your fees?

Very small and very large portfolios may fall on the extreme end of the spectrum for fees but for a reasonably sized investment portfolio with a value between $500,000 and $750,000, an annual management fee of 1-1.25%is appropriate. This should also include a full suite of products, planning and advice, as well as the regular communication and content we discussed above.

How Do High Fees Affect Your Retirement

Now, some people might say, well, it’s only a couple percent. How much difference does it really make? The short answer is - a lot. The longer answer is that it depends on the specifics of your situation - your age, the size of your portfolio, your investment timeline. But, in every case, overpaying fees by even a percent or two is going to significantly reduce your long-term wealth.

Here is an example that illustrates just how large an impact fees can have on your retirement situation:

Current Age: 40

Retirement Age: 60

Current Investments: $250,000 (non-registered)

Future Deposits: $1,000/month

Rate of Return: 6% (net of a 1% annual fee)

Inflation: 2%

Income Tax Rate: 35% (pre-retirement) / 25% (post-retirement)

These assumptions produce a retirement income of almost exactly $40,000 per year to age 85, a pretty comfortable number when added to your standard CPP and OAS benefits. Now, let’s say your advisor charges 2.5%instead of 1%. Without changing anything else, your retirement nest egg is now completely depleted by age 77, a full 8 years earlier.

That is certainly significant. Or, to look at it another way, you can still make it last to age 85 but instead of having $40,000 to spend each year, you will have just$30,700. A decrease in your income of nearly 25%!


So, the next time you think “it’s only a percent or two”,think again. Too many people have to pinch pennies in retirement because they have spent their lives paying too much in fees. Don’t make the same mistake.


Disclaimer & Legal

Any views or opinions expressed on this website are solely those of the representative, and do not necessarily represent those of Harbourfront Wealth Management Inc. The information contained herein was obtained from sources believed to be reliable, however, the accuracy is not guaranteed.

Click here to read more about Harbourfront Wealth Management's legal privacy policy.

Harbourfront Wealth Management advisors are currently licensed to sell equity securities, bonds, mutual funds, GICs and other securities that are subject to available regulatory exemptions. Your advisor may also offer insurance-related products and/or financial planning services. These services are not offered through Harbourfront Wealth Management Inc. However, your advisor is duly registered to provide these services under applicable insurance legislation and the dealer approves such activity to be conducted outside of the dealer.

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