Canadians are getting ripped off! You may have heard people say that they don’t
pay any fees to invest their money. Or maybe you even think that yourself. Don’t kid yourself, the banks and other
investment companies are in business to make money, they aren’t investing your money
for free. Of course, people need to be paid to provide
a service, but make sure you know what you’re paying in fees and getting value in return. I’m Susan Daley and this is Your Money,
Your Choices, and in today’s video I’ll outline the various fees associated with purchasing
and holding a mutual fund. Lots of people still think they’re getting
their investments managed for free because fees are often embedded within the mutual
fund. Thanks to increased exposure, investors are
waking up to the fact that we pay some of the highest mutual fund fees in the world! The more you pay in fees on an ongoing basis,
the less money you keep in your pocket and therefore the less you have available to fund
your retirement or other goals. That being said, going for the lowest fee
option might also not be appropriate if the investment isn’t structured properly and
isn’t right for you and the risks you’re willing to take. Ongoing fees you pay are expressed by the
Management Expense Ratio or MER of the fund. The management expense ratio outlines the
total fees you pay to your advisor and the mutual fund company, including the portfolio
manager’s salary and research expenses. This is why index mutual funds have lower
MER’s than actively managed fund, since they don’t need to pay for analysts and
research. The higher the MER you pay, the lower returns
you will get. For example, let’s saying you’re paying
high fees of 2.5% for your balanced 60% Equity, 40% Fixed Income Fund. If that fund earns a 5% return, you’ll only
actually receive 2.5% of that return. There are many ways your advisor can get paid. The most common way is through the trailing
commission. This is where the mutual fund company will
pay your advisor a certain percentage each year. This amount is included in the MER of the
mutual fund. So back to our example, let’s say that you’re
paying 2.5% for your mutual fund, and your advisor receives 1.25% a year for their services. The mutual fund receives 1.25% for managing
the fund, and your advisor gets 1.25% for managing the fund. The problem with this type of fee structure
is that, given two suitable options to invest your money, your advisor is allowed to select
the fund that pays them more, even if that means you pay more for essentially the same
fund. A front-end load or initial sales charge is
a fee paid to your advisor when you purchase the fund, and is expressed as a percentage
of the purchase amount. The amount after this sales charge has been
paid to your advisor is then invested. For example, if you purchased a fund for $1,000
and there was a 5% front-end load, you would pay $50 to your advisor up front and only
$950 would be invested. You would still be paying the annual MER on
the fund on an ongoing basis, and often pay a trailing commission to the advisor as well. A back-end load or deferred sales charge (DSC)
is where you get to invest your full $1,000 in the mutual fund up front, but if you decide
to sell out of the fund before a certain period of time, often between 5 and 7 years, you
have to pay a fee at the time of redemption. If you’re selling within the first year
or two, this fee is often as high as 5% or 6% of your assets! Your advisor gets a hefty commission up front
from the fund company, so the fund company wants you to stay in the fund and pay the
MER for as long as possible to recoup their costs. This gives investors much less flexibility
to move their funds around. Like the front-end load, the advisor usually
gets a trailing commission from the fund company in addition to the initial commission. But wait! There’s more! Some other fees associated with mutual funds
include a switching fee, where you have to pay up to a certain amount to switch from
one fund within the provider to another fund. For example, if you had a Canadian Equity
fund with RBC and you wanted to switch that to a Canadian bond fund, still at RBC, you
can be charged up to 2% to make that switch. The final most common fee associated with
mutual funds is a short-term trading fee or redemption fee. If you sell or switch your investments within
a certain period of time of purchasing it (say 7 days), you may have to pay a fee to
do so, often 2% of the value of your investment. Now, not ALL mutual funds have so many fees. A No Load fund doesn’t have any direct selling
charges associated with it. So you pay the MER associated with the fund,
but no initial or deferred sales charges. An F-class fund is one where the advisor receives
no compensation from the fund provider. As such, the MER is much smaller than other
classes of funds. In order to get paid, the advisor will often
charge a percentage fee based on the assets invested (or assets under management) separately. In summary, if you hold onto a mutual fund,
your total expenses will include the MER, plus any sales commissions you pay when you
purchase and/or sell the mutual fund. All fees associated with a mutual fund are
provided in each fund’s fund facts document. These are often available online and if you’re
working with an advisor, they can, and should, provide you with a copy. Which fund is appropriate for you may depend
on your situation, but in my opinion, a no-load, F-class fund with a separate management fee
is often the most flexible and transparent option when investing in a mutual fund. Do you know what fees you’re paying for
your investments? I’d love to hear about your experiences
with mutual funds and any questions you have about the fees associated with them in the
comments below! I put out new videos every other Wednesday,
so subscribe and click the bell to receive notifications. I’m Susan Daley and this is Your Money,
Your Choices.