Canadian coins stacked on a white background

With market uncertainty and low rates potentially cutting into returns, advisors need to consider cheaper products to reduce client costs, portfolio managers said Monday at an industry conference.

“In a world where expected returns are going to be very low, we advisors have to be very mindful of the drag that we are creating by the fees that we charge,” said John De Goey, portfolio manager at Wellington Altus Private Wealth in Toronto.

De Goey was speaking at the Inside ETFs Canada conference, which is being held virtually on Nov. 9-10. He was on a panel with Raymond James senior vice-president and portfolio manager Linda Shick and Endeavour Wealth Management president Grant White.

“My view is that we haven’t even begun to see the pain that we’re really going to see with regard to coronavirus,” De Goey said.

Returns for a 50-50 portfolio may not be higher than 3% while interest rates are at rock bottom and the economic outlook is uncertain, he said. That means clients in mutual funds that charge 2.25% would see three-quarters of their returns eaten up by costs.

Many advisors are targeting high-net-worth clients, De Goey said, but the biggest challenge will be serving accounts with less than $500,000. Advisors need to maintain a reliable client experience where the client is getting value, but advisors also need to be paid.

He said advisors might be justified in charging a premium for advice — say, 1.2% — if they sell low-cost products, notably ETFs, that keep the all-in cost for clients well below what they would be paying for mutual funds.

White said the industry has been underperforming in terms of the value many advisors deliver. He is also looking to drive down clients’ product costs with ETFs, separately management accounts, and by working with issuers on fees.

“If you’re reasonably concentrated in working with a set group of product manufacturers, they might be open to negotiation,” he said.

The panelists also discussed portfolio positioning at a time of both frothy valuations and deep economic uncertainty. The S&P 500 surpassed its all-time high Monday on encouraging Covid-19 vaccine data.

Nonetheless, “we are still one bad news story away from a 20% drop,” White said.

While overall valuations aren’t attractive, he said he’s keeping an eye on opportunities in businesses where there will be pent-up demand post-pandemic, such as the travel industry.

“We might see an effect of something like the roaring ’20s,” with money set aside and waiting to be deployed, White said. “We might see a nice little boom post-pandemic. We’re keeping an eye on things like that and really looking hard for valuations to see if we can get some attractive entry points.”

De Goey warned that there may be more “political grenades to be launched” in the months leading up to Joe Biden’s inauguration as U.S. president on Jan. 20. Court cases, even if unwarranted, could create market uncertainty.

Shick said advisors will face pressure about performance expectations after markets have rebounded so dramatically this year. Advisors will need to explain portfolio performance in terms of risks and specific goals, she said.

Shick also pointed to “a lot of sentiment change” in the markets right now that could create opportunities in the coming weeks. She said she would be looking to increase her technology weighting, for example.

Editor’s note: Investment Executive and Advisor’s Edge are media sponsors for this year’s Inside ETFs Canada event. This story was written independent of the sponsorship.