NOT all financial industry professionals are transparent with their fees. As a result, it can be overwhelming and difficult for investors to know the truth.
Many investors are not fully aware of the fees that they are paying for the services they are being offered and I would like to shed some light on the subject.
There are three types of accounts or products that are most important to review when evaluating fees: mutual funds, transactional accounts and fee-based portfolios. It is important that you completely understand the types of fees you are paying. Evaluating the performance against your fees will show if you are getting good value for your money. It is also vital that you know your fees before you commit to a relationship with an advisor and it should be in writing on a proposal before you embark on a new relationship.
. Mutual fund fees - this is where most of the confusion lies. There are front end, back end load (DSC) or even no load and all three have fees that you need to know about.
First, they all have underlying management fees that you don't see. This can be 1 per cent to 2.5 per cent annually depending if the mutual fund is in stocks or bonds. Second, there may be a commission to get into the fund, but not to sell the fund and this would be called "front end" and can be 0 per cent to 2 per cent paid upfront in addition to the annual management fees.
"No load" funds are usually sold by banks and this simply means there is no cost to buy or sell the fund but you still have the annual management fee - again you don't see this fee.
Last, and the one I disagree with and see the least transparency with, is the back end load, or "DSC" fund. When an advisor buys a mutual fund this way they get paid a big 5 per cent commission up front and you are now subject to a penalty fee of up to 7 per cent if you sell prior to the maturity date, which is typically seven years. I find this is rarely properly explained to investors, and these obstacles may prevent you from getting out of mutual funds at some point or it can be difficult if you need to draw income in the future. Note: I would absolutely never recommend an investor buy a DSC fund.
. If your account is set up to be transactional then this means that you would be paying a commission on every buy and sell on a stock in the portfolio. This may range from 1 per cent to 2 per cent of the total amount of the trade. For example, if you purchase $25,000 of a stock then your commission would be $250 to $500 for that one order and then it would be similar when you sell the stock.
. Fee-based - there is an annual fee on your portfolio and the portfolio manager or financial advisor can initiate trades with no extra trading costs. The fee usually ranges from 1 per cent to 2 per cent annually per account and it depends on how much you have in stocks versus bonds. This fee is transparent, as you would see it deducted from the account on your monthly statement.
Investors should always know how much they would be paying in fees before deciding to work with an investment team. It should be in writing in a proposal so that you are clear on how your advisor is paid.
Lori Pinkowski is a portfolio manager and senior vice-president, private client group, at Raymond James Ltd. This article is for informational purposes only and does not necessarily reflect the opinions of Raymond James. Reach her at 604-915-LORI or lori. [email protected].
