Hidden fees that could eat away at your investments
If you’ve ever worked up the courage to ask your investment advisor how much you pay in fees, the answer may not be so simple.
New disclosure rules call for some fees to be expressed in dollar amounts, but the amount investors pay in total often remains a hodge-podge that can be difficult to understand.
Investment advisors are usually paid through an agreement with the brokerage firm. The details are normally listed on what is known as a “grid” that rewards the advisor for generating more fees.
Some charge an all-inclusive flat fee expressed as a percentage of the overall portfolio. The percentage should fall as the portfolio gets bigger. A one per cent fee on a $1-million portfolio, for example, would be $10,000. Investors with smaller portfolios normally pay a higher percentage to provide comparable compensation for the advisor.
An advisor or broker could also charge on a fee-for-service basis, either by the hour or based on the specific services they provide.
The investment industry is constantly coming up with new ways to generate more fees, but here are some common charges that often fall under the radar:
- Management Expense Ratio: The MER is the percentage of the assets invested in a mutual fund that are deducted annually to cover operating costs, advisor fees, marketing, and fund manager salaries. MERs range from less than one per cent to three per cent or more each year whether the fund generates a return or not.
- Front-end sales or load commission: A fixed percentage based on the amount invested in the fund is taken off the top.
- Back-end or deferred fee: A percentage is charged based on the amount invested if it is sold in a certain time frame.
- Trailer fee: Annual fee the mutual fund pays your advisor to keep you in the fund. Trailer fees are included in the MER and are typically one per cent each year.
- Redemption fees: Paid by the investor when units in a mutual fund are sold.
- Switch fees: Fee charged to investors to switch funds within a family of funds.