No matter where you invest, investments have a cost even though it’s taken a long time for disclosure of those costs. After 10 years of deliberation and discussion, last year investment firms had to start reporting what clients are paying for their investments. Those fees may not be on every statement you receive. Do you know what fees you are paying?
Costs you pay to your financial planner or advisor can be paid in a variety of ways so it can be confusing:
- A fee for service based on a % of your investments being managed. I've seen these fees range from 1% to 2.5%. I charge 1%
- Sales charges or commissions on the purchase or sale of securities or mutual funds charged either at the time of purchase or deferred until the investment is sold . Such fees on the purchase of mutual funds (referred to DSC and FEL commissions) have finally and thankfully fallen out of favour. I do not charge any of these commission charges.
- A combination of fees and commissions
- An MER which is equal to the percentage of invested assets that includes both a management fee to the fund manager as well as operating costs including professional fees like legal and accounting as well as custodial costs. These fees are bundled together and charged against the earnings of the fund directly.
Generally speaking, there is no need to pay sales commissions on the purchase of mutual funds anymore either on an upfront or deferred basis. Fees can have a significant impact on your portfolio over time. Lower fees mean more of your money stays invested and grows. A difference of 1% may not seem like a big deal but it adds up over the long term thanks to the magic of compounding along with your investment returns. A 1% difference in fees means you lose the growth on that difference you might have had for what could be many years into the future.
Here’s an example that shows the impact of fees over the long term: Imagine if you had $100,000 invested in an account earning 5% a year for the next 20 years:
- If your fees were 2% a year you would have $180,611 at the end of those 20 years
- If instead your fees were 1%, you would have $219,113 at the end of those 20 years. That's a difference of $38,502 and that's why fees matter.
Low cost isn't the only attribute to consider in your relationship with a financial planner. It's important to also consider the value of the relationship and the other offerings included in your fee which may or may not include financial/estate or tax planning and tax services. If you are paying more you should get more. Sadly, it's now always a case of "you get what you pay for"
Needless to say, when return expectations for both stocks and bonds are subdued, fees matter even more. Have a conversation with your financial planner about the fees you are paying. Fees are a popular subject in recent months so don't be afraid to ask. Your advisor is likely having lots of discussions about fees with other clients. Such discussions may lead a financial planner to pick lower-cost options and you want to make sure those options make sense. Many advisors particularly those working in larger financial institutions may not be able to budge on fees and it may become necessary to consider another option.
Do you know what you're paying? Should you need some help understanding your statement including performance of your investments and your fees, please feel free to connect (without any cost or obligation).