How to Lower Your Investment Fees
Before you invest in any funds it’s important to understand the management fees that you will be dealing with. Management fees typically pay for essential services such as re-balancing your account and managing the fund. However, once you know what the average fees are, you can determine if the service and performance of your investment match what you’re paying to those who maintain them.
What Are Investment Fees and Why Do We Pay Them?
When you buy a new home or make a trip to the grocery store, there are costs involved with the transaction. The same holds true when you invest. Whether you’re saving for a big-ticket item or retirement, it’s important to know how much your fund manager or financial advisor charges for your business.
When investment portfolios are well-managed, the fees are well worth the sacrifice. Just make sure that you get the value you expect without paying exorbitant fees that slash your return on investment. In fact, you should hold off on making any investment decisions until you fully understand how it works including investment fees
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Load Fees
Load fees are sales and commission fees. For example, if you invest in a mutual fund that charges front-end loads, you are charged whenever you contribute to your account. For a $1,000 investment with a 5.75% fee, you pay $57.50, reducing your contribution to $942.50.
Back-end load fees charge you when you withdraw money from your account. They are often higher than front-load fees.
If you have a new load fund, you aren’t working with a financial advisor and have no commission to pay. However, when your fund increases in value, so will your maintenance fees.
When you purchase mutual funds, you pay a financial advisor through one of the following methods:
- Load (commission-only)
- Advisor fee (fee-only)
- Combination (fee-based)
Expense Ratio
The prospectus contains the fees associated with the mutual fund. These make up the expense ratio.
Management fees pay for the services of financial advisors called portfolio managers. These professionals make sure the investments in your fund remain profitable. In return, they receive management fees. Distribution and service fees, also known as 12B-1 fees, pay for marketing costs for the fund. Administrative fees cover salaries for fund managers, researchers, and recordkeepers.
Some funds cost more money to run which affects the expense ratio.
Typical Range of Fees for Financial Advisors?
Typical ranges for financial advisors run from 1-3%. If you are working with a financial advisor, your fee depends on the number of transactions that you perform. For example, you might pay 1 to 2% when you set up your portfolio and then zero to 2% afterward. You can also talk to your advisor about setting up a fee-based account to reduce your fees.
With $1.2 million to invest, Steve, you will have access to 99% of investment options. It may only be that 1% of advisors have thresholds of $2 million, $5 million, or more.
Many firms charge under 1% but big banks tend to charge more due to their overhead costs.
Typical Range of Fees for Robo-advisors?
Some Robo-advisors charge percentage-based fees while others charge a flat rate. In general a flat rate, you can expect to pay between 0.2% to 0.5% of your total assets. For example, for a $10,000 investment with a Robo advisor charging 0.5, you pay $450 a year.
Remember to look into how taxes are handled. This differs for a TFSA or RRSP. Some Robo advisors provide tax harvesting to reduce your taxes and offset capital gains.
Comparison of Fees Offered by Canadian Robo-advisors
Here are the MERs for several Robo advisors in Canada for your comparison purposes.
BMO SMARTFOLIO – Minimum account investment: $1,000.
INVISOR – Management fees: Flat 0.5% fee.
Minimum account investment: None, but investments begin when you accrue $1,000.
JUSTWEALTH – Minimum account investment: $5,000 (excluding RESP accounts which have no minimum)
NEST WEALTH – Minimum account investment: None.
RBC INVESTEASE – Management fees: Flat 0.5% fee. Minimum account investment: No minimum (deposit held until the account reaches $100)
When comparing any investment fees, look into how much of your profit it’s eating away. If you are making enough due to the diligence of fund managers, it may be worth the extra cost.
