A guide to getting value from your advisor, and shifting to lower-cost investments


A MoneySense reader writes:

I have investments with a financial planner and my fees are 2% or more per year, for a total of close to $6,000 per year in fees. I’ve been looking at moving my investments to a robo-advisor, but I’m concerned about the capital gains and subsequent taxes from moving my non-registered account. 

First, how can I calculate what the gains are to understand the taxes I may have to pay—and is there a way to avoid paying the capital gains taxes? 

Secondly, my financial planner justifies the fees I pay because we meet once a year and he prints out a plan that I never even look at. When I started working with him in 2012, there were few other choices. Today, is there something investors can access that’s in between a full-service advisor and a robo-advisor? 

FPAC responds:

First, let’s address the primary impetus for your dilemma, which is your concern about fees. The old saying goes that “price is only an issue in the absence of value,” so one can presume that your concerns have come up due to an absence of value from your financial planner. 

How to assess whether you’re getting value from an advisor

Fees of $6,000 per year are a material amount for any investor. Right now, roughly half of this amount is being paid to your financial planner as a “trailing commission”—and for the amount your advisor is receiving, you are right to expect more than just an annual meeting. 

In thinking about the value your advisor provides (or does not provide), here are some questions to consider: 

  • Does your financial planner have a comprehensive financial plan in place that’s customized for you, or is it just a rudimentary cookie-cutter retirement analysis? 
  • In addition to annual meetings, are they in regular contact with you by phone or email, helping guide you through the market ups and downs? Were they in touch in early 2020, when the pandemic’s onset triggered a market meltdown? 
  • Are you one of a hundred clients, or one of a thousand?

Is a “hybrid robo-advisor” the solution?

If you’re looking for an alternative to a full-service advisor, there may be some options in between full-service advice and robo-advice. “Hybrid robo-advisors” offer a bit more of a human touch within a robo-advice platform. 

With this kind of service you might get the added benefit of being able to contact a qualified Certified Financial Planner by phone, as needed, but keep in mind that in this arrangement, that advisor would never really get to know your particular situation, as you could be one of thousands of customers they help out.

Understanding the capital gains and tax consequences of moving your mutual funds

Since it sounds like you’re entirely in mutual funds now, a straight move to robo-advice will entail selling all of your investments, as robo-advisors typically use ETFs (low-cost funds that trade on a stock exchange, hence the name “exchange-traded funds”), not mutual funds. Selling your funds may attract some taxes on the gains in your funds over their base cost. 

Generally, most financial institutions do a good job of keeping track of the base cost of your investments. This cost can be difficult to calculate manually with mutual funds, which typically pay and reinvest distributions regularly and may sometimes also spit out so-called “returns of capital,” which can muddle the base cost calculation. 

If you reasonably trust the information on your statements—for example, if you’ve had these investment accounts with the same firm all along—you can use the base cost or “book value” on your statements to calculate your capital gains. On each fund that you’ll be selling, the capital gain is simply the book value subtracted from the market value at time of sale. 

If you have a bunch of different funds, you might find that some of them are in a loss position, which can offset the gains. If you sell everything in 2021, in early 2022 your existing financial planner’s firm will send you a T5008 slip which shows the capital gain/loss calculations for your 2021 tax return.

What you will end up being taxed on is half of the net capital gain—your total gains minus your total losses—multiplied by your marginal tax rate. Your marginal tax rate is the rate you pay on each incremental dollar of income, and if you have a lot of capital gains it might be a higher rate than you’re used to. A good resource to determine your tax rate is the tax calculators from accounting firm Ernst & Young.

As an example, if your marginal tax rate is 30% and you have $20,000 of capital gains, $10,000 is added to your income for the year and you’ll end up paying an extra $3,000 of tax (or $10,000 times 30%).

Strategies to manage your capital gains tax bill

It may be possible to avoid, or at least defer, any resulting tax bill, depending on what particular mutual funds you own and whether you’re willing to go a different route than a robo-advisor with your non-registered account.

As I mentioned earlier, the funds you have now pay a “trailing commission” to your advisor. One option may be to move your funds away from your advisor and into a lower-cost version of the same funds which do not pay a trailing commission to an advisor. 

  • For example, if the funds you own are also available in a “D-series” version, you can move them as-is to any discount brokerage and then switch from the higher-cost versions of the funds you have now into the lower-cost D-series versions of the same fund. (D-series funds include only a 0.25% commission to the discount brokerage instead of 1% to an advisor.)
  • Alternatively, some discount brokers may allow you to own the “F-class” versions of funds, which are free of trailing commissions and would typically cost 1% less in yearly fees than your current funds, cutting your costs in half. 

These strategies could help you save on capital gains tax, as switching from one sales structure to another within the same mutual fund is not considered a “deemed disposition” for tax purposes, and thus does not lead to capital gains. 

Putting tax into perspective

With that said, taxes shouldn’t be the only consideration with the funds in question. If they’re really exorbitantly expensive, and especially if they’re not appropriate (anymore) for your financial situation, you may want to sell them anyway, even if there’s a resulting tax bill. 

Keep in mind that you can’t avoid capital gains taxes, only defer them; and you should also consider what your tax rates are today versus in the future, when making this decision. On the other hand, moving into a cheaper fund structure will start to produce savings right away, even if there’s a tax cost associated with doing so. 

This response was provided by FPAC member Markus Muhs, CFP, CIM, Investment Advisor & Portfolio Manager with Muhs Wealth Partners at Canaccord Genuity Wealth Management in Edmonton. Markus provides comprehensive financial planning and evidence-based portfolio management to families and businesses across B.C., Alberta, Ontario and Quebec (www.muhs.ca). His views, including any recommendations, expressed in this article are his own only, and are not necessarily those of Canaccord Genuity Corp.

Qualified Advice is written by members of FPAC (the Financial Planning Association of Canada), a MoneySense content partner. The association’s goal is to set standards and principles that will allow financial planning to evolve into a knowledge-based profession that ultimately commands the credibility, public awareness and respect of other respected advisory professions, working closely with governments, regulators, financial planners, academia, vendors and the general public.

The post A guide to getting value from your advisor, and shifting to lower-cost investments appeared first on MoneySense.



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