Do you know how much your investments are costing you? I wouldn’t be surprised if you didn’t. I was pretty clueless waaaay back when I started investing my hard-earned cash in a basket of mutual funds — they came highly recommended by a friendly financial advisor, after all.
And fees? What fees? My financial statements didn’t tally any fees for me to be concerned about, and I never wrote a single check to my advisor for her services. So where were all the fees? As far as I could tell, my investments were fee-free. Awesome!
What wasn’t awesome was the day I read an article similar to this one: Do fees really matter? In this article, financial journalist Duncan Hood argues that paying a single percentage point more in fees can cost most portfolios tens of thousands of dollars in lost savings. That much?
No way. Not possible. Never. Nope. Ok, I was in denial. So I did some financial fee sleuthing, number crunching, and nearly chocked on my myriad of mutual funds. It turns out I was paying fees. A lot of fees. A smorgasbord of fees that was slowly, and stealthily, devouring my savings and consuming my portfolio. WTF? (Yeah, What The Fee?)
Anyways, my gut-busting numbers mirrored those in the article’s math — indeed, paying one percent more in fees really was hosing my savings. Don’t believe me? Let’s do some simple mathy math that won’t cause your eyeballs to roll back into your head. Promise.
Fees: A tale of two mutual funds
Ok, let’s assume you’ve invested $25,000 for 25 years and managed a pithy return of 4%. Now let’s look at what happens to your delicious savings when they’re invested in two different mutual funds: Fund 1 boasts a hungry fee of 1.30% while Fund 2 chews one percent less at 0.30%.
Results: Over 25 years, greedy Fund 1 consumes $11,393 of your cash in fees, while Fund 2 costs just $3,000. Which portfolio would you rather retire on — the one devoured by fees at $48K, or the one barely tasted at 62K? That’s the price of one percent, people.
Now take a peek at this chart for another perspective, and see how much pie is gluttonized (new financial word) by one single mutual fund fee, called the Management Expense Ratio (MER).
Note: These numbers were crunched using the Investor Education Fund’s Mutual Fund Fee Calculator.
Do you want more pie for yourself? Time to learn about your fund fees.
Investing Fees: I see where you’re hiding!
A quick tour of the greediest fees lurking in your portfolio.
1. Management Expense Ratio (MER). It’s called a MER. Saying it out loud sounds a little like cooing in your lover’s ear. But I assure you, the only ones cooing over this lovely fee are your financial advisor and fund company. That’s because whether your mutual fund makes or loses money, you’re still paying a percentage of that fund’s value to cover administration costs, management, and perhaps trailer fees paid to your financial advisor. The MER charged can range between fund companies and countries, but I’ve seen anywhere from a super low 0.07% to a super high 5.50%. Yep, the MER can be an expensive fee if you’re not watchful. The less MER you pay, the more money you keep.
2. The front-end load. This sales fee will shave a little off the top when you purchase a fund, right before the money is invested. So investing $5,000 with a 2% front-end load costs you a cool $100 and leaves $4,900 invested. Poof, your money is gone.
3. The Deferred Sales Charge (DSC). Do you like wearing handcuffs? Then welcome to the DSC, also called a back-end load, where you’re charged a hefty fee for selling your fund before a certain number of years, usually 6-7. Investing in a fund with a DSC handcuffs you to that fund and perhaps the advisor, because it can be too expensive to pay several percentage points to get out of it. I fell for this killer fee once, but never again.
4. Trading costs or commissions. Selling or buying funds at a rapid pace will cost you dearly in commissions. Consider the commission cost before buying a financial product with only a small amount of cash — you could be paying a hefty commission with a humble investment to show for it.
5. The annual account fee. Newbie investors with smaller accounts should pay close attention to their annual account or administration fee. Always ask to have a $25, $50, or $100 annual fee waived if you’ve only got a few hundred or thousand bucks saved since that fee will eat into your return.
Where to find your fees
Financial disclosure of investing fees varies around the world. Some countries protect their people with stiff rules and regulations, so you may see your total fees paid in dollars on your financial statements, rather than stated as a percentage of the fund. Lucky you!
Since I’m Canadian I speak from my personal experience, and financial disclosure is the pits here in the land of EH! — that’s why I was clueless about the actual amount of moolah (in dollars) I was paying in fees eons ago. So I learned to do the math. To best protect yourself, it’s a smart financial move to READ each fund’s documentation and use that knowledge to find your total fees paid.
Every fund you purchase comes with documentation. Here’s where to find it:
1. Ask your advisor, fund company. Your financial advisor or fund company should be providing you with investment fund documents (such as a mutual fund prospectus) detailing each fund’s holdings and fees. Also, check your fund company’s website for this vital information — it may be available online for download.
2. Check with Morningstar. Surf on over to Morningstar for snapshot information on all sorts of financial products, such as stocks, ETFs, and mutual funds. Americans can use the tools on Morningstar.com while Canadians can access fund information on Morningstar.ca.
3. U.S. Securities and Exchange Commission. Americans can use the SEC’s Search Tool to lookup mutual fund prospectuses.
4. Canadians can use SEDAR. If you’re a Canuck and you’re stuck looking for a fund’s details, try the SEDAR Search Tool. Filing securities related information on SEDAR is mandatory for most reporting issuers in Canada.
Investment Fee Calculators
Now that you’ve got the numbers, use of these handy tools to total your fees paid. Yes, you can do it.
- Americans — give Bankrate’s Investment fees calculator a spin.
- Canadians — see the Investor Education Fund’s Mutual Fund Fee Calculator.
- For those looking for a quick tool, try my Portfolio MER Calculator — it’s perfect for tallying the average MER on your entire portfolio as well as the total yearly expense incurred. This handy financial tool may just inspire you to find lower-cost investments!
About those fee calculations…
Don’t be surprised if your fund fees are much higher (or lower) than those in my examples. Investing fees can vary greatly between countries, among fund companies, and within fund classes. Canadians should pay special attention to their mutual fund fees though — a recent Morningstar report shows that Canada pays the highest fees among the 22 countries surveyed.
“The report found the median asset-weighted expense ratio to be 1.31% for fixed-income funds, 2.31% for equity funds and 0.80% for money market funds.”
– Morningstar Grades Canada an F in Mutual Fund Fees, Moneysense Magazine
I’m the first to admit that investment fees can be a tough subject to face up to. But it’s important, so please do it.
Question: Ever get bitten by these investing fees? What have you done about it?