5 Ways to save on investment fees

Canadians pay the highest investment fees in the world! 

The average management expense ratio (MER) in Canada for an equity fund is 2.37%. Translated another way, an investment portfolio of $100,000 would cost you about $2,350 to fees every year on average!

MER’s are not the only fee associated with investing although it makes up the majority of your costs. The MER is an embedded fee, meaning its “hidden”. It’s available to see on any fund perspective and its also mandatory for your advisor to disclose this in dollars ($) on your reports.

Quick note: Its mandatory for only mutual funds and not segregated funds. The recent changes to disclosure of investment fees only covers investments held through mutual funds. Segregated funds offered by insurance companies are exempt from this new disclosure. A great advisor will disclose fees on any investment.

Load options are not the only area of fees.  There are many types of fees such as:

$ Advisory and management service (AMF)
$ Redemption charges
$ Short term trading fee
$ Transfer out fee
$ Account closing fee
$ Guarantee fees
$ Unscheduled redemptions and courier fees
$ Other service fee

Load options commonly referred to as “sales charges”:

Front-end Load: This is a fee or initial sales charge by the investment firm for selling the fund. It can be anywhere from 0-5% and is taken from your investment prior to purchasing a fund. The fee may be negotiable. Example: a $100,000 deposit with a 3% front-end load will result in $97,000 deposited to the fund and $3,000 going to the investment firm. The investment firm gives a portion of the $3,000 to the advisor who sold you the fund.

Advantage: If at some point you choose to move your investment to another company you will not experience any sales charge fees to move your money. This is assuming the fund cannot be moved in-kind to the new institution (often it can be). There may be other fees associated with moving your money such as transfer fees or account closing fees. Ask your advisor if they are willing to absorb these fees.

Disadvantage: Front-end load fees from1-5% means less money is being invested.

Back-end Load Option: Many companies are doing away with Back-end Load charges or Deferred Sales Charges (DSC). While its been a massive part of revenue for investment companies, its also been the biggest area of contention among investors. Largely because many advisors didn’t disclose the fee. When investors choose to move their money to another institution they’re hit with a  DSC fee as high as 5.5% ouch! DSC example: on a $100,000 deposit, the client is charged a 5% DSC fee. This fee is only charged to the investor if they withdraw money (above a certain annual amount between 10-20%) or move their investment to another investment company. The fee is a declining schedule and may look like this:

Let’s say the investor moves their $100,000 (assuming no gain on the initial deposit) to another investment company in the 3rd year. The investor would incur a $4,000 DSC fee resulting in $96,000 going to the new investment company (also not assuming a transfer fee and account closure fee).

✚ Advantage: 100% of the investors’ money goes toward purchasing their investment.

Disadvantage: DSC fees charged to the investor to move their money to another institution. This fee can in many cases, dissuade an investor from moving their money away until the DSC fee expires after 7 years.

Low-Load Option: Same as DSC fee although the schedule is cut in half. Typically 3%, 2.5% 2%.

5 ways to save on investment fees, retire richer and way more happier

First above all, is to have your advisor provide full written disclosure of all the fees prior to your investment. Commonly known as the “Reason Why” letter, this document details the “reason why” you purchased the investment. It should list such items as:

• what are your goal i.e. savings, retirement, capital purchase
• timelines
• risk tolerance
• fees & commissions
• who was present at the time of purchase
• analysis of why the particular fund was used
• analysis of your current situation and desired outcome

options to lower your investment costs:

1. Exchange Traded Funds (ETF): These investments typically have very low MERs and are readily available through online trading accounts, banks & brokerages. Whatever your investing in say a mutual fund can easily be found in an ETF.
2. Dividend Reinvestment Plan (DRIP): Generally speaking, this is for long-term investors who favour high dividend producing stocks, and regularly reinvestment opportunities, a DRIP is an excellent low-cost option. DRIPs allow investors to purchase stocks directly through a transfer agent vs. stock broker thus eliminated the trading fee.
3. Trade less often: Sounds odd I know however, the idea here is to find core investments that suit your investment goals. Core investments are changed with less frequency as other investments.
4. Low-cost advice & management: As DSC fees are being fazed-out there is an increasing shift to fee-for-planning. Depending on your assets under management (AUM) these fees can range from 0.25-1.5%. The range depends on the scope of work your asking the advisor to perform i.e. Portfolio Management vs Financial planning.
5. Taxes: Talk with your advisor and tax professional about ways to mitigate the tax on your investment gains and also whether the fees can be deducted at tax time. 

Want to know which companies have the highest fees?

We’ve done all the work for you and looked at 10 investment companies. Want to know which company has the highest fee (Management Expense Ratio or MER) and which has the lowest?

No Load Option: This load option is in favour and widely used in banks and brokerages. This isn’t to say there are no fees as there are many fees as mentioned above. No load is similar to Front-end load in that the fee charged is 0%. There are zero dollars charged to your investment meaning 100% of your money goes to the purchase of your fund and there are no fees to move your money away other than account closing fee and transfer fees.

Yes, I want to know if I’m paying the highest fees! Please contact me.

[wpforms id=”298″ title=”false” description=”false”]