The Enlightened Investor – Fees & Expenses

Written by Chris Turnbull on Jul. 14, 2013

Fees and expenses are the single biggest reason professional money managers fail to outperform the market return.

It is also a primary cause of investor frustration. What percentage of investors is aware of all the types of fees and expenses they incur? And would a good consumer, let alone a smart investor, sink hundreds of thousands or even millions of dollars into something and not know what it cost them each year?

It’s common knowledge that mutual funds charge a management expense ratio (MER). Less known is the trading expense ratio (TER); an additional fee related to the level of trading within that portfolio. In simple terms more trading equals more costs and more taxes that result from realizing gains. Mutual funds with 100% turnover and total fees exceeding 2.5% are so common that you might even own one.

Mutual fund fees are not scalable. They charge the same fee, regardless of whether $20,000, or $2 million is invested. However, the fee (as a percentage of assets under management) charged by a private counsel portfolio management firms declines as the total portfolio under management increases. Private counsel firms generally charge a total fee of 1.5 percent, which includes the manager fee, a custody fee, and investment funds MER. As the portfolio size increases, the management fee declines. For this fee you receive advice, portfolio management, and proper reporting.

Current financial reforms for the Canadian investment industry will require firms to report costs, commissions, and performance for investor accounts. The firms will also have to provide details about advisor compensation. These changes are scheduled to come into force as of July 2016.

If you would like more information or have any questions, feel free to contact us at 780.466.6204, or click here to send us an email.

Thanks to Chris Turnbull of The Index House for providing much of this content.

The Index House is a division of Polaris Financial Inc.

Chris Turnbull

Chris's Contact Information

Other Posts by Chris

Jun 9 2013
The Enlightened Investor-Understanding Returns

One thing frustrated investors often lament are their returns. So here's a question. Do you know what your returns really are? Find out more about how to measure your returns including some great but simple investment benchmarks over the last 5 years.

May 7 2015
The Enlightened Investor – Risk (ETF’s)

Investors often remark that the world economy has changed and that it's more volatile than ever. They are less trusting of stock markets and they don't want to take risk. I can't say I blame them. I might ask though, if the world has changed, if it is more volatile, "how are you changing the

Sep 16 2014
The Enlightened Investor - A Game Plan

Do you make investment decisions according to what looks good at the moment? These purchases are often based on opinion and influenced by emotion. It can be exciting - much like buying lottery tickets. Clearly, following a predetermined, diversified, well-thought-out, long-term investment strategy is preferable. Here’s why. Dalbar’s study[1] of investor behavior shows how investor

Dec 9 2014
The Enlightened Investor-Retirement Income

Eventually investors move from the “saving-years” to the “drawing-years”, when they want to start drawing an income from their portfolios. This can be confusing. For many the natural inclination is to liquidate their diversified portfolio in favor of income-producing stocks or bonds. However, the idea that retired individuals should load up on dividend-paying common shares

Mar 26 2015
The Enlightened Investor: Is Your Portfolio Leaking Tax?

It may be obvious to state that an investor only keeps the after-tax return. It is less obvious how to minimize the tax leakage from your portfolio. A good starting point is to identify the two primary causes of tax; portfolio turnover and an inefficient portfolio structure. Taxes resulting from portfolio turnover can cost you

Jun 23 2015
The Enlightened Investor: A Diversified Portfolio vs. a Collection of Investments - “Recovery Returns”

Do you want a portfolio that’s vulnerable to wild swings in value? Likely not. In fact less volatile portfolios are both easier on the stomach and they help you achieve better long-term returns. For example, a portfolio that declines 10% this year requires an increase of 12% next year to recover its losses. If your

Jul 16 2015
The Enlightened Investor: A Diversified Portfolio vs. a Collection of Investments “The Only Two Things You Need to Know About Modern Portfolio Theory”

Our best technique for protecting portfolios is called Modern Portfolio Theory. This Nobel Prize winning idea said it is insufficient to look at investments in isolation as is done in the traditional approach of picking stocks and bonds. Rather rational investors will seek out “efficiently diversified portfolios” offering the highest expected return for each level

Jun 9 2015
The Enlightened Investor-Deadline for the $500 Alberta Centennial Education Savings Grant (ACES)

If you have a child that is 10 years old or younger (born in Alberta between January 1, 2005 and March 31, 2015) they are eligible for a one-time $500 grant from the provincial government. However, you only have until July 31, 2015 to submit the form and apply for this grant before it ends

Oct 20 2015
The Enlightened Investor: What is meant by “market return”?

The investment industry and media often refer to the “market” and the “market return”. Or that the market was up or down on the day and that a portfolio manager's return outperformed or underperformed the market return. So what exactly do they mean and how does it relate to you? The market generally refers to

Sep 29 2015
The Enlightened Investor - Moving Small LIRA’s to Your RSP

When you have a job transition, you may transfer your pension plan savings to a locked-in-retirement account (LIRA). LIRA’s are similar to Retirement Savings Plans (RSP’s) but with more restrictions. Adding another investment account will also add extra administration to managing your retirement savings. Alberta pension legislation allows people age 50 or older to transfer

May 11 2016
The Enlightened Investor: A New Trustee Act for Alberta

Provincial legislation is periodically updated. In Alberta, a revised Wills and Succession Act came into effect in 2012, an updated Estate Administration Act was passed in 2015 and now an initiative is underway to co-ordinate the Trustee legislation across Canada. The Alberta Trustee Act is the provincial legislation governing the administration of trusts. A trust

Dec 15 2015
The Enlightened Investor:Calculating the Cost Base of a Security Held in Multiple Taxable Accounts

Congratulations! You just sold and realized a profit on that promising investment (stock, mutual fund, ETF etc.). When you’re done planning how to spend your windfall you might also consider how much tax you owe on that gain. Unless the sale occurred within a non-taxable RSP or TSFA. Normally, this is fairly straightforward. You

Jul 28 2016
The Enlightened Investor: Powers of Attorney for Property

A power of attorney for property is a written document by which a grantor appoints an attorney to act as a substitute decision maker with respect to the grantors property or financial affairs. This grant of power becomes effective immediately upon the grantor signing the document unless otherwise indicated. While a General Power of Attorney

Feb 21 2017
The Enlightened Investor: Registered Account Investment Fees Are Not Deductible

In November 2016, Canada Revenue Agency warned investors who are deducting investment fees charged for the management of their registered accounts that they are subject to a tax penalty perhaps as great as that fee. A registered account is a TFSA, RSP, RIF and the various locked in versions. Investment fees charged to registered accounts