Looking for an Alternative to Mutual Funds?
When you first started your investment journey, you likely began with mutual funds, probably the most popular way in Canada to build a portfolio over time. But if your account has grown well into six figures, it may be time to look for an alternative. Mutual funds can be a great starting point, but, for larger accounts, there may be more appropriate alternatives.
The primary reason is cost. The average equity mutual fund in Canada charges a management fee of about 2.5%. This fee is embedded in the fund and is not tax-deductible in either a registered or non-registered account. In addition, you may be paying your advisor a commission on trades or a fee to manage your account.
Mutual funds can be expensive from a tax perspective as well. In a non-registered account, portfolio turnover can result in capital gains which are taxable on an annual basis, even though you haven’t sold any of your units in the fund.
If your account is large enough, you may want to consider the alternative of working with a discretionary investment counsellor or portfolio manager. Once your portfolio reaches several hundred thousand dollars or more, you will find that the size of your investment pool affords a lower fee structure than is available with mass market mutual funds. This is because investment counsellors manage larger accounts on behalf of fewer clients and do not incur the additional expense of third-party distributors – it’s all about economy of scale. Fees are fully disclosed on client statements and are tax-deductible for non-registered accounts. Fees generally range from 1% to 2% and are often lower for larger balances or fixed-income investments.
Because your portfolio will be invested in individual securities, you and your investment counsellor can decide when to trigger gains, based on your individual circumstances. By avoiding triggering taxes in a high-income year, you can lower the tax cost of your overall portfolio.
Discretionary management means that the investment counsellor has the authority to make investment decisions without getting prior approval from you for each transaction. These decisions will be based on your objectives and risk tolerance as outlined in an Investment Policy Statement. Portfolio managers have a fiduciary duty to act in the best interest of their clients, and, as fiduciaries, they are subject to the highest level of education and experience requirements in the securities industry.
If you would like more information about investment counselling services, a good place to start is the Portfolio Management Association of Canada (PMAC) at www.portfoliomanagement.org. PMAC represents over 150 companies whose primary focus is discretionary investment management for clients such as wealthy individuals, foundations and pension funds. And, of course, we’re happy to discuss your investment needs at any time.
