Reports show Canadians pay some of the highest fees in the world to manage their mutual fund investments, according to a story in the National Post. And while it's true Management Expense Ratios can run between 2% and 3%, it is also true that in life you get what you pay for.
lf it makes sense for an investor to own professionally managed products, then you have to pay the professional manager (see Why Do People Say When You Purchase A Mutual Fund, You Are Buying The Fund Manager?). lt's no different than hiring a lawyer. Regardless of whether they win or lose in court, they still have to be paid. lf you're earning 10% a year after fees of 2.5%, are you really going to be upset about paying for that advice? If the results are there, then the cost is worth it.
Here are a few key pieces of advice you can use to minimize the expense of investing without sacrificing diversification or rates of return.
- Understand what you have in your portfolio, what you're paying for those investments and the results. Effective July 2016, advisors will have to disclose mutual fund fees in dollar figures creating a greater level of transparency for investors, as noted in the Globe and Mail.
- Ask your advisor to explain their fees and what they are doing to earn them. For example, if you have a bond portfolio with very few transactions each year, why should you pay a flat fee solely based on the value of the portfolio? ln this case, it may make more sense to pay-as-you-go on a transactional basis.
- Create your own mutual fund. lf you have $100,000 or more to invest, rather than buying managed mutual funds, build a custom portfolio of individual securities and bonds. Working with an investment advisor who understands the market and is licensed to buy and sell stocks, you can expect to pay a flat fee, or fee for service rate of approximately 1% to 2% on the value of the portfolio as opposed to typically higher mutual fund fees. ln addition, the adviser's fee can be tax deductible for income tax purposes (consult a tax expert for verification).
- Consider investing in Exchange Traded Funds (ETFs), which often have lower fees than those associated with mutual funds because they tend to be passively managed. In my opinion, it makes the most sense to invest in ETFs that are narrowly focused on specific sectors or geographic regions as opposed to broad-based indexes such as NASDAQ, the S&P 500 or the TSX, which are much more volatile.
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read all articles in Allan Small's Prime Earning Years Series ----------
What's Your Investment Style?
Why Is It So Hard To Buy Low & Sell High?
Why Do People Say: When You Purchase A Mutual Fund, You Are 'Buying' The Fund Manager?
Diversification Does Not Mean Buying As Many Investment Types As You Can
Is Gold A Safe Haven?
The Impact Of World Events On Investing
Nervous About Retirement?
When The Market Falls, What Should You Do?
How To Reduce The Cost Of Investing Without Sacrificing Returns
Make Sure You Have An Investment Strategy