Where is your money going?
- Brokers – Commissions on transactions. Conflict: They have an incentive to encourage transactions that make them money.
- Mutual fund sellers – Trailing commissions. Conflict: They have an incentive to recommend funds with the best returns to make them money. But the most profitable funds are also usually the riskiest.
- Financial institution representatives – Conflict: They usually only recommend in-house products from the institution they work for and the products that make the most money for the institution.
Sales fees are common when purchasing mutual funds and can represent up to 5% of your investment.
Sales fees are common when purchasing mutual funds and can represent up to 5% of your investment. They are charged to investors directly out of the account and transferred to the advisor who recommended the fund. This method is not as common because it allows the client to see clearly what fees the advisor is being paid.
Trailing commissions are annual commissions paid by mutual fund companies to financial advisors to cover the cost of their services and expertise. They are included in the fund’s management fee (and make up the management expense ratio, or MER). They are an important component of the fund’s MER and reduce your ultimate return.
The MER includes a fund’s management fee and operating expenses. In Canada, MERs range from less than 1% to more than 3% of the fund’s value. Investors do not pay MERs directly. Instead, they are taken from the fund’s return. This helps disguise the actual amount you pay, since you never receive a fee statement.
Taxes also represent hidden costs that many investors forget about. Whether they are Canadian or foreign, taxes erode your purchasing power. Holding a good security in a bad account can lower your return. A seasoned portfolio manager is able to offer strategic guidance to boost your net return.
SAVING 1% PER YEAR FOR 20 YEARS AMOUNTS TO 22% MORE IN YOUR POCKET.
WHAT IS AN EXCHANGE-TRADED FUND (ETF)?
An ETF is an exchange-traded fund. Like a mutual fund, an ETF provides instant access to a portfolio of stocks, bonds and more. Like stocks, ETFs are bought and sold on the stock exchange. There are two main categories of ETFs: index ETFs and actively managed ETFs. Some index ETFs charge very low fees (0.05% or less). Actively managed ETFs typically have higher fees and are similar to conventional mutual funds.