When “free” gets expensive
Zero fees can still mean big costs — especially when behaviour, taxes and advice incentives are in the mix.
I recently saw an ad…you may have seen it, too.
A black-and-white, two-column comparison. On the left side there was a long list of fees being charged by Canada’s big banks. On the right side there was a corresponding list with one satisfying difference. Instead of a cost for each service, it just says the fee is: zero.
Monthly account fees. ATM charges. Overdraft protection. Wire transfers. Foreign exchange fees. Etc.
The headline lays out their argument, plainly: banking in Canada is expensive, and there’s another way.
It’s a very good ad. Maybe even a great ad!
And really, it’s pretty hard to argue with, from a consumer’s point of view. A company that lowers everyday banking costs is good for us. Nobody has ever walked away from an ATM thinking, “You know what would improve this experience? (Aside from a Lysol wipe at the ready.) A higher service charge!”
But if you kept on reading all the way down the list, something interesting happened.
The ad stopped talking about banking.
Suddenly the right-hand list included things like stock-trading commissions, options trading, investment accounts, mutual funds, fiduciary advice and the cost of transferring investment accounts.
That caught my attention.
Because, I hope this is clear to my readers by now, banking and investing are not the same thing. And once we move from the cost of a chequing account into the world of investing and financial advice, “What does this transaction cost?” becomes only a tiny part of a much bigger question.
Human beings are weird about money.
We’ll drive across town to save a few cents on gas and then make a major financial decision based on the advice of someone’s cousin we met at a BBQ.
We’ll complain about a monthly service charge while skimming the fine print on that credit card application.
Visible costs get our attention. But that doesn’t necessarily make them the important ones.
A monthly account fee is a cost. So is an ATM charge.
But there can also be a massive cost involved in selling investments because markets got scary and you panicked. And another cost involved when things start to look more stable, so you buy back the thing you sold when it was in freefall.
It can be pricey to hold an investment you don’t understand. It’s expensive to pay more tax than necessary because you didn’t plan ahead.
Retiring before figuring out whether your money can actually support the life you have planned can be the ultimate in uninvestigated expenses.
And making a decision about an inheritance, a business, a pension, or (maybe especially) an estate without understanding what else that decision affects can be way more expensive than you’d imagine.
There will never be a line on your bank statement saying Bad Decision Tuition Fee: $37,000.
That would be great, though. It would at least get our attention.
Cheap and valuable are different things
The cost of things matters. But cost isn’t the same as value.
Something can be cheap and useful.
Something can be cheap and trash.
Something can be expensive and worth every cent.
And, as most of us have discovered at least once, something can be both expensive and terrible.
That means the better question isn’t, “How much does this cost?”
It’s: “What am I getting for the price I’m paying?”
That question applies to pretty much everything in life, but for some reason we forget to apply it to financial advice.
Sure, sometimes the lowest-cost option is a good one.
But also, sometimes the lowest-cost option has some really high costs that you just haven’t noticed yet.
The goal is to figure out the difference.
“Free” can still cost you a bunch of money
Investing is a particularly good example.
Technology has made investing dramatically cheaper and more accessible than ever before. Today, pretty much anyone can open an account and buy or sell investments from a phone. On an airplane even. Or from the toilet. Maybe from the toilet ON an airplane.
That is a significant advancement. Sort of.
But easier and cheaper access hasn’t done a single thing to change human behaviour.
We’re still scared when markets get volatile, jazzed up when they rise, and way too susceptible to getting excited about whatever everyone else appears to be making money on.
The transaction itself may be cheap or even free.
But the decision you made can still end up being very expensive.
If a low-cost investment platform helps you follow a disciplined plan for decades? Great!
If there’s no one standing between you and hasty or bad decisions, leaving you free to chase performance, or react every time the world gets scary? In that case, the lack of a trading fee probably won’t be the number that has the greatest impact on your goals.
A comparison based on transaction costs becomes less useful when it starts making points about investing and financial advice.
Those services need to be evaluated on more than what it costs to push a button.
Nobody is doing this for free
There’s another useful question whenever a financial service is advertised as free, “How does the company make money?”
That isn’t me being cynical. Or self-serving.
It’s just a good-sense question when it comes to anything you’re signing up for.
Businesses are supposed to make money. Banks make money. Investment firms make money. Technology companies make money. Financial advisors make money.
There is nothing inherently wrong with that.
But when someone is telling you their services are free…you should work hard to understand how the people and company you’re dealing with are compensated.
If you aren’t paying directly for a particular service, that doesn’t mean there’s no business model behind it. The company is earning revenue, and pleasing its shareholders, somehow.
It might be perfectly reasonable. And it might be a trade-off that you feel good about; it might even work in your favour.
But understanding where the money comes from helps you understand the incentives involved and decide whether the relationship still makes sense for you.
The same standard should apply to everyone handling your money.
The price tag is only the beginning
Fees matter.
You should know what you’re paying for financial services. You should also question charges that don’t seem to provide value.
Competition that makes those services cheaper and better is good for all of us. We love to see it. In fact, we spend a lot of time talking about the changes needed in the financial services industry. A quote our CEO is fond of is, “We want to be a nice restaurant on a street of nice restaurants, not the only nice restaurant on the street.”
Don’t stop asking questions when you see those zeros. Ask exactly what you’re getting for free. Ask how the company makes money. You should also ask what incentives are involved for the person giving you advice, and what risks you’re taking.
Sometimes zero really is a great price.
Most often, it just doesn’t tell you the whole story.
About Ainsley Mackie
Ainsley Mackie, Portfolio Manager, is part of the team at Verecan, where she helps cut through financial jargon with a clear and candid voice. Her thoughts have been featured in national outlets including the Financial Post, The Globe and Mail, and the Toronto Star. In 2020, she received Wealth Professional Magazine’s Award for Excellence in Philanthropy and Community Service, recognizing her ongoing contributions to community and charitable initiatives. Ainsley brings the same approachable style to her work that she does to life in the Kootenays, keeping money matters grounded, human, and practical.
Read more jargon-free financial advice from Ainsley
The Hidden Cost of ‘Free’ Financial Advice
Choosing a Financial Planner: Why Balance Beats “Die With Zero”
The Untold Cost of Chasing Big Investment Swings
The money stories we inherit (and why they’re so hard to let go)
When being “good with money” isn’t the whole picture
You don’t need Bay Street (or Oak Bay!) money to start acting like an investor
Spring confidence isn’t a strategy: What the seasons do to your investment decisions
Why good financial advice shouldn’t change based on gender
Canada Strong Fund: Big name, bigger questions
The retirement number is not the point
Prediction markets are coming to Canada
