Personal Investor: How fees could ruin your retirement
If you want professional portfolio managers to help you reach your retirement goals but don’t have a lot to invest, you might find yourself in a catch-22 situation: the cost of professional advice will leave you less to invest.
Professional management involves building a diversified portfolio spanning geographic regions and sectors, and adjusting the assets over time to adjust to market conditions and an investor’s changing needs. Most Canadians get that diversification through mutual funds. A typical fee on a mutual fund, also known as a management expense ratio (MER), is 2.5 per cent of the total amount invested each year. On a $50,000 portfolio that’s $1,250.
But that $1,250 each year is also money that will not be allowed to accumulate and compound over decades.
Part of that MER paid to the mutual fund company is returned to the advisor as compensation. In some cases they are also compensated by a one-time fee when the fund is bought or sold, known as a load.
Wealthier investors tend to pay smaller flat fees usually ranging from one per cent to 1.5 per cent. While the fee is a smaller portion of the amount invested, the amount in dollars is much higher. As an example, one per cent of $1 million is $10,000. Wealthy investors also tend to get the best advice because advisors can make a decent living with fewer wealthy investors.
To keep more money in their pockets – rather than pay fees – many young investors turn to basic exchange traded funds (ETFs), which track indices and are not subjected to oversight from an advisor.
ETF fees are usually a fraction of a per cent, but do not include professional advice for investors as market or personal circumstances change.
February is Your Money Month at BNN Bloomberg. For more stories and practical advice on how to employ your money wisely, visit our Personal Finance page.