Effective January 1, 2017, new rules compel investment firms and advisors to clearly outline the costs of any funds held by their clients. Previously, many investment fees were hidden within incomprehensible prospectuses and financial reports that most investors rarely read.
How do the various fees you pay on your investments – whether you do it yourself or use professional management – affect your ability to accumulate real wealth?
Whether included in funds you’ve selected as a MER, added on as a brokerage commission when you buy or sell a security, or charged by an advisor, as an investor it’s important to:
- be aware of exactly how much you are paying in fees,
- reduce excessive fees that are dragging down your returns, and
- consider how much value you are getting for the fees you are paying, such as financial, tax and estate planning or a winning portfolio
Here are some of the most common investment fees:
Brokerage account fees
Annual fees: May be charged for accounts holding less than a minimum balance. They may be waived under certain conditions.
Subscription fees for premium research tools: Most on-line brokerages have free research tools that are sufficient for all but the most experienced and sophisticated of investors.
Trading commissions: Charged when you buy or sell stocks or ETFs. Some brokerages offer commission free trades on a limited selection of ETFs, some have no-cost ETF purchases only. Some brokerages offer discounts for active, high volume traders.
Mutual Fund Fees
Sales loads: A sales charge on some mutual funds which is paid to the broker or salesperson who sold the fund.
- Front load – An up-front fee taken immediately from your new contribution, often can be negotiated.
- Back-end load – A deferred sales charge paid when you redeem your funds, the amount reduces the longer you own the funds until it eventually gets to zero. Now, thankfully, being phased out.
Short-term redemption fees: This is charged when you redeem a fund within a short period of time after the purchase – usually 7 – 30 days. It’s to discourage short-term trading.
These are annual fees charged by all mutual funds, index funds and exchange-traded funds. They are designed to cover operating costs including management and administrative costs.
Trailer fees are paid by the mutual fund company to the broker for ongoing services.
Funds that are actively managed usually carry higher expenses than index funds and ETFs which passively track an index. Global and sector funds will carry higher fees than bond and Canadian equity funds.
The fees and expenses that a fund pays are deducted from the fund before returns are calculated.
Management or advisory fees
If someone is managing your money – whether a human financial advisor or a robo-advisor – you are paying for it.
These annual fees are typically a percentage of the assets under management and can include the cost of advice as well as trading commissions. Some advisors also earn a commission from the sale of specific investments.
You need to understand how your advisor is paid and how that impacts your investment.
Other investment fees
Some other fees that you may come across are:
- Fees for paper statements and trade confirmations – opt for no cost e-services.
- Account transfer fees – some financial institutions will reimburse these fees for their new customers.
- Full or partial withdrawal fees – usually for making a withdrawal from your RRSP.
- There is often a fee charged to you when you purchase a bond through a broker. Bonds are traded between financial institutions at a wholesale price and then sold to the retail consumer at a markup.
- Principal protected notes, which normally guarantee the principal if held to maturity, have fees than include commissions paid to the advisor, ongoing management fees and performance fees to the portfolio managers.
Lower fees, smarter savings
Many investors are unaware of the fees they pay for their investment products. Until recently it was hard to track how much we were paying. Account maintenance fees and asset management fees are often subtracted directly from our portfolios before we receive our investment returns. Commissions are usually rolled into an investment’s purchase price or subtracted out of the sales proceeds.
We can’t avoid all investment fees. If we buy mutual funds or hire financial advisers, we should fully expect to pay for their services. Instead, the goal is to understand what we are paying – and to know how the cost of investing can impact your real returns over time.