Investors working with financial advisers often face challenges in assessing the value of the services they receive, particularly in balancing fees against investment performance. A recent portfolio review of a couple working with an adviser from a major investment management firm revealed investments loaded with high-fee mutual funds that underperformed compared to lower-cost alternatives.

One prominent example from their portfolio was the Mackenzie Bluewater Canadian Growth Balanced Fund, which carries a management expense ratio (MER) of 2.3 percent. Over the past decade, this fund delivered an annual return of 5.84 percent. In contrast, the iShares Balanced ETF Portfolio (XBAL), an exchange-traded fund tracking stock and bond indexes with a similar asset allocation, achieved a 7.95 percent annual return over the same period. This difference translates to a nearly $3,900 higher value on a $10,000 investment after 10 years in the ETF compared to the mutual fund.

Such underperformance combined with elevated fees has prompted advice that clients should consider terminating relationships with advisers who recommend costly funds that consistently lag market benchmarks. For investors concerned about high costs or poor returns, alternative options include do-it-yourself investing through index-tracking ETFs, which generally charge fees between 0.1 and 0.2 percent annually, or robo-advisers that offer managed portfolios at fees ranging from 0.4 to 0.8 percent.

Financial advisers typically operate under two primary compensation models: commission-based and fee-based. Commission-based advisers receive payments indirectly from mutual fund companies, often through trailing commissions ranging from 2 to 2.5 percent. These commissions, paid continuously while clients remain invested in a mutual fund, contribute to higher overall fees that reduce returns.

Alternatively, fee-based advisers charge clients a direct fee—commonly around 1 percent of assets under management—billed monthly or quarterly. While clients still incur mutual fund MERs, these are generally lower since fee-based advisers tend to offer F-series or fee-based funds that do not pay trailing commissions. Additionally, fee-based advisers can recommend low-cost index mutual funds or ETFs, which typically have significantly lower fees than actively managed funds.

Research from S&P Global indicates that actively managed funds underperform index funds approximately 98 percent of the time, underscoring the advantages of low-cost investing options. Investors working with fee-based advisers are encouraged to request detailed proposals that prioritize low-cost funds and transparent disclosure of total fees, including management expense ratios.

Currently, annual statements required by advisers may omit clear breakdowns of fees embedded in mutual funds, obscuring the full cost borne by investors. Starting in 2027, the Canadian Investment Regulatory Organization will mandate more comprehensive fee disclosures, incorporating MERs to enhance transparency.

In the meantime, investors can independently verify their fund fees by reviewing individual fund profiles online and calculating total annual expenses by multiplying the MER by their invested amount. Confronted with unexpectedly high fees, clients are advised to question their advisers about these costs or consider alternative strategies, including switching to advisers who prioritize cost efficiency or transitioning to self-managed investing options.