Fees are always a hot topic in the financial industry, often for lack of transparency and value.
Unfortunately, it's an area that is usually poorly explained by financial professionals leaving investors in the dark with regards to the numerous hidden charges built into many of today's investment products.
While most investors realize they are paying a fee for investment advice or investment management services, few know exactly how those fees are paid.
When it comes to investment costs, there are typically two ways investors are charged; fee-based and commission-based. Fees are usually a monthly or quarterly amount based on a percentage of the value of the portfolio and are an ongoing cost. Commissions on the other hand are only paid when an investment is bought or sold. Each has its own benefits depending on your investment strategy but you need to be aware of the limitations on each so you can know if you are getting value for your money.
Fees in Canada can range from reasonably low to surprisingly high, although it's probably safe to say that most investors generally don't know how much they pay. This is because they may not see the charge itself and it's rarely explained clearly! In fact, we've heard a few investors say that they don't pay any fees and yet their accounts hold all mutual funds. It's the classic, out of sight, out of mind scenario, because mutual funds certainly do have fees but they are buried within the fund itself. Just because you can't see the fees doesn't mean that you're not paying them and unfortunately when it comes to mutual funds, the average fee is much higher than other forms of investing.
Mutual funds fall under the fee-based method of investing but are often held in commission-based accounts. Besides the commission you may or may not pay to buy these funds, there is an annual management fee, which is on average 2.5 per cent but can be more than 3.5 per cent.
The only way to find what fees you are paying on these funds is to research the fund itself. Websites like globefund.com and morningstar.ca give you the tools to look up funds to see the management fee (also known as the MER) as well as historical returns.
Many investors believe that commission-based investing is the way to go for "buy and hold" strategies. However, that same buy and hold strategy just doesn't work in these volatile markets.
Fee-based investing is more efficient for actively managed portfolios as it allows the manager to buy and sell without worrying about transaction costs. It can substantially reduce the overall cost compared to a commission-based account if there are many transactions throughout the year. However, you need to ensure that there is an active strategy being used. You also want to ensure you are not holding investments with fees inside of a feebased account. This is a commonly overlooked area where investors believe they are only paying a single management fee but end up paying double the amount because there are hidden fees on the investments inside the account as well.
The value you get for your fees is the most important aspect of the equation and this can be measured from the after-fee return or net return.
There is no sense in paying a low fee if you're not making any money. Conversely, paying high fees for poor returns is equally troublesome. Ultimately, transparency is key, no matter the style of investing and type of accounts you're invested in.
Lori Pinkowski is a portfolio manager and senior vicepresident, Private Client Group, at Raymond James Ltd., a member of the Canadian Investor Protection Fund. This is for informational purposes only and does not necessarily reflect the opinions of Raymond James. Lori can answer questions at 604-915-LORI or [email protected].
