The Enlightened Investor – Fees & Expenses

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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.

Financial reforms for the Canadian investment industry require firms to report costs, commissions, and performance for investor accounts. The firms also have to provide details about advisor compensation. These changes came 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.

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