As portfolio managers, one of the most important parts of the job is managing emotions. And what stirs up emotion? Cost.
We’ve all seen the commercials from “Those Who Shall Not Be Named,” where they question why anyone would still pay high fees to “their dad’s advisor.” That certainly elicits some emotions, and sure, for some investors, a lower-cost DIY solution might make sense. But for many, the fees can be justified: it’s about having someone in their corner. Someone to coach them through the emotional ups and downs that come with investing, including what they should be paying higher fees for.
It will be vital to stay ahead of the conversation on fees, especially with CRM3 coming down the pike. Starting in January 2026, clients will receive new reports that give a much more detailed breakdown of the total costs they’re paying, including everything from management fees and trading expenses to performance fees by line item. The first of these reports will land in their inboxes in 2027, and for many, it will likely raise some questions.
For some advisors and portfolio managers, this might feel like a threat. But for those who can prepare proactively and clearly show the value the products add, it’s actually an opportunity. If you can demonstrate that what clients are paying for translates into better outcomes, whether that’s returns, risk management, or just diversification, then the conversation shifts from “What am I paying for?” to “What am I getting?”.
And it’s not just about showing value to clients; this is also a chance to take a hard look under the hood of your portfolios. CRM3 can serve as a healthy prompt to reevaluate some of the higher-cost solutions you’re using and ask whether the value they’re delivering still holds up, or if it can be achieved through a more cost-effective approach.
In this article, we’re going to take a closer look at where active management earns its keep and where a passive approach might be the right call. The goal is to help you frame the value conversation before CRM3 does it for you.
Is The Cost Worth It?
A good starting point is to get a sense of where your portfolio’s costs stand compared to others. We work closely with over 40 high-profile investment teams, and the chart below shows the range of effective MERs we’re seeing across their portfolio models.
Chances are that your portfolio falls somewhere in this range. If you’re on the lower end, you’re probably in a good spot and don’t need to make any big changes. But if you’re at the higher end, or even above, it might be time to take a closer look and run a cost analysis on the model. If there’s an opportunity to lower fees without many sacrifices, why not take it?
When to Use Active Management
In our portfolios, we follow a guideline that active management tends to add more value in less efficient areas like emerging markets, small caps, and Canada, to name a few. The use of active management can be amplified during times of heightened volatility when mispricings can create opportunities. In many cases, it isn’t just about returns, but also about risk management. Nobody controls risk in a market cap-weighted index, as it simply reflects the size of the underlying companies.
Take the TSX, for example. With nearly 50% of the index concentrated in Financials and Energy and minimal exposure to sectors like Health Care and Consumer Discretionary, it’s hard to argue that it’s truly diversified. On the flip side, passive strategies often make more sense in highly efficient, well-diversified markets where alpha can be harder to come by consistently.
Ultimately, this is more of a “smart guideline” than a hard guideline. We like to blend both approaches and focus on building well-rounded portfolios. It’s not a battle of good versus evil, but more like choosing the right tool for the job. Sometimes you need a wrench, sometimes a hammer… and sometimes duct tape (well, hopefully not duct tape).
When we look at the 40-plus investment teams we meet with, most of them are running portfolios that are about 80% active. No surprise, the heavier active tilt tends to push up their average MERs. Whether that’s money well spent really depends on what’s under the hood.
How to Analyze Costs
That’s where a cost analysis comes in handy. Start by flagging the pricier holdings in your portfolio and figure out how much they’re contributing to your overall effective MER. It's likely that the higher cost is justified, but it’s worth digging in to be sure, whether from a return rationale, better diversification, or delivering a more unique performance stream for the portfolio.
Here are a few things you can check to see if your holdings are really earning their spot.
- Active share – This tells you how different the manager’s portfolio is from its benchmark. If it’s too close (think under 50%), you might be paying active fees for something that behaves like an index fund. You want to see meaningful differences if you’re paying for it.
- Turnover rate – How often is your manager trading? Some activity is good (that’s what you’re paying them for), but if it’s all churn and no value, that’s a red flag. Balance is key.
- Consistent alpha – One good year doesn’t make a great manager. Look for consistent value-add over time, and ideally across different market cycles. That’s not easy these days, but it’s still a worthwhile check.
- Upside/downside capture – Is your manager doing what they said they’d do? Growth managers might shine on the way up but lag in downturns. More defensive strategies might miss the big rallies but protect you better on the downside. One isn’t better than the other; it's best to just be sure their results match their mandate.
- Correlation with other products – Is your manager offering something different or just duplicating exposure you already have? If two strategies are moving in lockstep, you might be overpaying for overlap.
Final Thoughts
Keep in mind a lot of these metrics are backward-looking; what really matters is where they’re headed. Make sure your holdings’ current strategy still lines up with the role you intended them to play in the portfolio. This is especially important with alternatives: fees are higher, things can get complicated, and you want to be sure they’re adding real value.
Whatever you’re looking at, try to use the longest time frame possible and encompass many different market environments. It gives you a clearer picture of consistency and whether they still deserve a spot in the portfolio.
If you’re interested in finding out where your portfolio stacks up on costs, we’d be happy to help. Whether it involves running a detailed cost analysis or reviewing specific holdings, it’s a great opportunity to make sure everything in your portfolio is delivering the value it should be. Feel free to reach out if you’d like to explore it further.
— Brett Gustafson is an Associate Portfolio Manager at Purpose Investments
Sources: Charts are sourced to Bloomberg L.P.
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