There is a trend sweeping the investing world. Investors are now choosing fee-based investing over the traditional commission-based. Fee-based investing has become a favourite amongst investors primarily because it offers information about advisor fees that is upfront and easy to understand. Like commission-based investments, this type of investment is backed by knowledgeable financial advisors, commission-free trading and tax benefits, but investors can save hundreds.
According to the Vanguard Global Advisor Trends report released earlier this year, 83 per cent of advisors believed that a fee-based business model is better for their firm; 76 per cent felt that fee-based advice was in the best interest of their clients. This shift towards a fee-based approach is stronger than ever, with both advisors and investors benefiting from the trend.
What is Fee-Based Investing?
Fee-based investing differs from a traditional commission-based investment account in how the advisor is paid. Fee-based means the advisor receives a percentage of his or her client’s assets. In comparison, advisors overseeing commission-based investments are compensated via transaction fees from purchasing.
What are the Benefits of Fee-Based Investing?
Advisors who are paid through commission are compensated by the client upfront. A trade can cost $125 to $150, but this amount can vary according to several factors like the trade size and the investment firm’s business model. On the other hand, clients don’t pay extra for trades in a fee-based account.
The benefits of going with a fee-based account are evident, but in order to rebalance your portfolio, you may have to incur back-ended redemption charges or ticket charges. This can become quite costly, and it may be more cost-effective to wait until your funds have matured to move them. Once in a fee-based account, holders can complete the trades without a commission charge.
There are also tax benefits to fee-based investing. As outlined in the Income Tax Act, taxpayers who consult and pay a portfolio manager for advice on buying or selling shares and securities are able to deduct the amount when filing taxes.
Types of Fee-Based Accounts
All fee-based accounts come with investment advice from a competent financial advisor, portfolio construction and rebalancing. Clients will continually receive updates on their account’s status. Within the category of fee-based investment accounts, there are two main types clients can choose from. Depending on the investment firm, one or both may be offered.
The first type of portfolio service offered is the general account discussed so far. A personalized investment strategy with advice from a professional investment advisor and commission-free trading are the highlights of this account. For investors who would like to share less of the responsibility of daily trade decisions, a discretionary trading account is ideal. This type of investing comes with the same perks, but clients won’t receive a telephone call every time their portfolio manager makes a trade.