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Financial Intermediaries


Mutual Funds

This is probably the option that is best known to investors. The mutual fund offerint is well diversified both by  type of product and the number of institutions offering them. Unfortunately, these products are often sold on a commission basis and their management fees are high. According to Morningstar's Global fund experience (2009), Canada is recognized as the country where mutual funds fees are the highest in the world. According to the study, the typical Canadian investor pays between 1.25% and 1.49% for bond funds from 0.40% to 0.89% for money market funds and between 2.00%  and 2.50% for an equity fund. Index mutual funds with lower management fees do exist, but in these cases, investors must decide by themselves their asset allocation and there are not enough different products in Canada to create well diversified portfolios suitable for all investor profiles.

Generally, when an investor meets an advisor from a financial institution that offers mutual funds, he will likely be offered funds from that institution and will not enjoy the benefit of choosing from the whole universe of products. It should be noted that for small portfolios (less than $ 15,000), mutual funds can be a good solution.  

The main players are: the big financial institutions (Royal Bank of Canada, Bank of Montreal, Scotia Bank, TD Bank, CIBC, National Bank, Laurentian Bank, Mouvement Desjardins), insurance companies, IGM Financial, Fidelity Investments, Invesco Trimark, Franklin Templeton Investments and Phillips Hager & North.

Full Service Brokers

This is a personalized portfolio management service which is expensive and where the alignment of interest between the client and the broker is not always obvious. Indeed, the full-service brokers operate in 2 different remuneration modes: fee based or transaction based.

In the case of the fee based mode which is generally a percentage of the client's assets per year, the broker has no incentive to analyze all of his client portfolio's with the same level of dedication. The broker will give more importance to the largest accounts because they generate more income for him. The costs associated with this type of compensation is greater than 1.0% for well-diversified portfolios below 500,000$ and can exceed 2.0% for equity portfolios of 100,000$.

In the case of the transaction based model where the broker charges a fee for each trade, the broker's interest is to generate a high number of trades that are not necessarily in the long-term interest of the client. This will not be apparent as the broker will undoubtedly have very good reasons to execute each trade, but in the end lots of trades might not have been required. Indeed, it is generally sufficient to rebalance a portfolio to its target allocation only once a year. It is therefore usually not necessary to trade frequently.

These observations must be interpreted in a context where brokers still want to retain their customers and therefore a balance is required between the interests of the broker and the client!

Discount Brokers

This is a competitive service for investors who are willing to take their own investment decisions and execute trades themselves on the web. Investors are responsible for their own asset allocation. Too often, the investor's portfolio suffers from under-diversification and an excessive allocation to equities. The corollary, an underweight position in bonds, often comes from the fact that trading bonds is still over-the-counter (OTC) and not as transparent as trading exchange-listed equities. For portfolios with less than 50,000$, transaction costs are often too high to justify buying bonds directly unless the investor plan's to hold the bonds for several years.

The main players are : subsidiaries of big financial institutions (Disnat, BMO InvestorLine, National Bank Direct Brokerage, RBC Direct Investing TD Waterhouse Discount Brokerage, Scotia iTrade, CIBC Investor's Edge), QuestTrade, Interactive Brokers Canada.

Financial Planners

The service offered by this professional group is very important. A financial planner can thoroughly analyze the situation of an investor and propose a global solution for all financial needs of an individual. Financial planners who charge a fixed amount for their work are often the best option for consumers. On the contrary, too often, financial planners also base their compensation on commissions received on the products they suggest to their clients, such as mutual funds. In these cases, the financial planner has a financial incentive to offer the products with the highest commissions and the investor will often end up paying more than 2.0% per year in fees to manage his portfolio.

If you're a financial planner who is not obliged to offer investment solutions from a single financial institution and mainly suggest mutual funds to your customers, you might want to consider our Managed Service or our Advisor Service for some of your clients. Depending on the way you charge your clients, they could save on their investments fees and you could keep on receiving a reasonable fee for your services. Here is an example Suppose a client with a portfolio of 200,000$ invested in mutual funds whose average costs are 2.25%. Such an investor pays 4,500$ in annual fees. Using our managed service, the costs of portfolio management would be about 1% (2,000$), plus your fees. In addition, the customer's advantage would increase gradually as the portfolio increases. Awesome, is not it. The larger the portfolio, the higher the customer's advantage is important. Feel free to Contact Us if you have any questions.

The main players are : more than 8 000 financial planners in Quebec.

Insurance Companies

On the investment side, insurers offer products with either an insurance in case of death, a guaranteed minimum return or some kind of capital protection. These products meet specific needs of investors but their total costs are often higher than 3.0% per year. With this level of cost, investors are generally better off using a combination of low cost financial products that can offer a better return expectation. For a life insurance policy, an investor is generally better off buying it separately.

Employer pension plans


Employers that offer pension plans to their employees use two distinct approaches. The first being the defined benefit plan and the second being the defined contribution plan. In the first case, the employer bears the market risk and promises the employee a predetermined annuity based on his years of service and salary. Current demographic trends mean that employers are less able to bear the risk of such a program. Also, faulty assumptions primarily related to long term expected returns are such that the contributions required to maintain promised benefits, in recent years, have been increasing sharply. It is likely that this trend will continue. Doing so, young workers will have to assume an ever increasing cost to enable the employer to honor these promises to current retirees. It is anticipated that this type of program will be phased out or that the benefits will be gradually reduced. The main risk of defined benefit plans is that beneficiaries are treated as unsecured creditors in bankruptcy, thus making the promised benefits dependent on the long term financial strenght of the employer.

Unlike the first approach, the defined contribution plan does not promise an employee a predetermined pension. The employer makes contributions in addition to those of the employee. The employee is responsible for its investments and inherits the responsibility of making it grow. Often, employers offer a range of products (typically mutual funds) for which it has negotiated reduced management fees. Given the tax rules and because the employer makes contributions on behalf of the employee, these plans are generally advantageous when compared to RRSP investments that an employee would make on his own.


Private wealth management firms

Private wealth firms offer customized portfolio management for individuals with investable assets generally over 250,000$ (and often much more).  These services are often accompanied by related investments, such as estate planning, tax planning and trust solutions.

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