In a commission-free world, fee-based expenses will cost more than embedded commissions.

Invesco Canada CEO Peter Intraligi explains that “In the fee-based accounts, the fees tend to be higher. The average fee ranges between 1.2% and 1.5% because the dealer has to take 100% of the administration charges. The traditional mutual funds with a trailer fee take 1%, and the company does the administration.” 

These high fees will hit small investors hardest, Alain Huard, Invesco's vice president, Retail Sales, Quebec says. The fees usually decrease as the assets in the account increase. Several factors enter into the cost of these fees, and there are “as many methods as there are firms or even advisors,” he says.

One constant remains: “Mutual fund dealers demand that each account be profitable. Sometimes advisors must charge higher fees on small accounts to attain this profitability,” Huard explains. He gave the common example of a sliding scale according to the total value of a client’s account.

Between $250,000 and $500,000 under management: 1.3%

Between $500,000 and $1 million under management: 1.0%

Between $1 million and $3 million under management: 0.8%

Between $3 million and $10 million under management: 0.6%

At the highest average cost, the fee-based account will not always be more expensive. “Even if an advisor charges 1.5% on an account, the client will not necessarily pay more than for a mutual fund with commissions,” Huard adds.

Fee-based accounts may include equity, bonds and exchange-traded funds (ETF), whose annual maintenance cost is very low. Huard gave the example of a typical Canadian equity ETF, with a management expense ratio of 0.5% in a fee-based account at 1.5%. These total costs of 2% compare favourably with those of a Canadian equity mutual fund with a commission, whose total costs average 2.3%.