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Nov 1, 2023

Unlocking Value In Your Investments

by Jean-Paul Bureaud

Do you know how much you pay in investment fees? A FAIR Canada survey showed most investors don't have a solid grasp of the fees they pay. A staggering 77% were concerned they were paying too much. Only 28% felt very confident they understood them, whereas 63% reported not understanding them. 

These results are consistent with other research. In a test of retail investors' financial literacy, the Ontario Securities Commission found that people scored lowest in their knowledge of investment fees. Similarly, the Canadian Investment Regulatory Organization (formerly Mutual Fund Dealers Association of Canada) found that retail investors have trouble understanding fees, and less than 20% could identify the fees outlined in the Report on Costs and Compensation they receive each year.

These results are troubling because the more you pay in fees, the less money you have to invest. Some fees also reduce the returns on your investments. The good news is that you can avoid higher fees by asking a few basic questions and taking time to learn how they work.

Recognizing the effect of fees is a critical step toward maximizing your returns and saving more money for your child's education or your retirement years. In this article, we explore fees associated with the two most common types of investment fund products: mutual funds and exchange-traded funds.

Investment Fund Fees

As with any business, running an investment fund involves costs. To pay the fund's operating costs, the fund manager takes money out of the fund instead of charging investors directly. Because investors are not billed directly, they may not appreciate how these costs impact them.

Management Expense Ratio (MER)

 The Management Expense Ratio (MER) is the main fee charged by the fund manager. The MER is deducted from a fund's assets to cover operating expenses, including management, legal, accounting and marketing costs. Expressed as an annual percentage, a typical MER ranges from one per cent to three per cent of the fund's assets.

While these percentages may seem insignificant, they reduce the fund's net returns. Let's assume your mutual fund increased in value by five per cent this year. If the fund's MER were two per cent, your net returns would be only three per cent, not five per cent. If you had invested $15,000, this means you would have earned $450 instead of $750. And if the fund's value decreased instead, the MER would still get paid, increasing your potential losses.

While the difference between an MER of one per cent and three per cent may not seem like much, it can add up over time. Assume you invested $15,000 in a fund with an annual MER of one per cent, and it returned five per cent a year for each of the next 20 years. After 20 years, your investment would be worth $33,000. Increase the MER by two per cent, and your investment would be worth about $10,000 less.

As the example shows, small differences in the MER can really impact your long-term financial goals.

Trailing Commissions

The MER may include a commission that the fund manager pays to your advisor's firm. Called a trailing commission, it compensates your investment advisor for providing you with ongoing advice and services related to the fund. For mutual funds, these fees range from 0.25% to 1.5% of the amount you invested in the fund. They are paid annually to your advisor for as long as you remain in the fund.

While these percentages may seem trivial, they erode the value of your investment because they are added to the MER.

Sales Charges

A sales charge is a fee you pay when you buy or sell an investment fund. These charges compensate financial advisors for helping you buy or sell the funds. They vary among funds and between fund series. Some funds, called no-load funds, do not charge sales commissions. Instead, the fees in a no-load fund are typically reflected in the fund's MER.

Other funds may include a front-end load sales charge. This is a percentage of the amount you invest (typically between one per cent to five per cent) and is deducted upfront from your initial investment. The remaining portion is used to buy fund units. For example, if you invest $10,000 in a mutual fund with a five per cent front-end load, $500 is deducted as the sales charge, and the remaining $9,500 is invested in the fund.

Although they are now banned, investors may still hold funds with deferred sales charges (DSCs). Also expressed as a percentage of the amount invested, the DSC is paid when the fund is sold. The amount of the charge will depend on how long the investor holds the fund.

Fund Series

A single fund is often sold under a distinct "series." Having multiple series allows the fund units to be sold to different investors through various outlets, such as through an advisor, a discount broker, or a fee-only account.

Each series is usually designated by a letter and has different sales charge options or fees associated with it. For example, Series A is sold by an advisor and includes a front-end sales charge, whereas Series L typically includes a reduced or low-load sales charge. Series D is geared toward do-it-yourself (DIY) investors, whereas Series F is designed for advisors who work on a fee-only basis and does not include sales charges.

Understanding sales charges and series can help you choose the most appropriate option and minimize fees.

Tips for Navigating Investment Fees

Here are some tips for navigating fees and gaining a clearer picture of the true costs of investing. These tips apply whether you're a DIY investor or you work with a financial advisor.

1. Compare Different Fund Options and Series Research. Compare similar types of funds. Check how much they charge in MERs and trailing fees and try to buy suitable funds with lower fees.

2. Review your Annual Cost Reports Carefully. Pay attention to the different fees and costs. If the report is unclear, ask your advisor to explain the costs in plain language.

3. Ask About Compensation. Discuss with your advisor how they are compensated and how you can reduce your fees and sales charges.

4. Negotiate!  Most fees are negotiable. You can also shop around to find the best fees and services. An ideal time to negotiate is when starting to work with a new advisor.

5. Fee Calculator.  Using a fee calculator, such as the one from the Ontario Securities Commission or the British Columbia Securities Commission, will illustrate how fees affect your returns. Another helpful tool is the T-REX calculator, which generates a score showing how much of your investment returns you'll keep and the impact of your fees over a lifetime of investing.

By understanding fees, you can take control of your financial future.

Jean-Paul Bureaud, Executive Director of FAIR Canada. Formerly a financial sector expert at the World Bank Group. He also worked for 20 years in senior leadership and policy roles at the Ontario Securities Commission. His valuable insights have appeared in the Globe and Mail, Financial Post, Investment Executive, and other publications. To learn more about FAIR Canada, visit