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Some people will disagree with my broad use of the word fee, but I believe that any money paid out, regardless of how it’s paid, is a fee.
Every business sets out to make money, or at least cover the cost of doing business. Even not-for-profit organizations need to raise enough money to cover their costs if they want to keep operating.
In the investment industry, this is done through some type of fee or commission. Whether that fee is visible, hidden or negotiable depends on the type of investment you’re purchasing.
Even with a guaranteed investment certificate (GIC), term deposit or savings account, there are costs or fees. These fees are hidden. The financial institution pays you a rate of return for holding your money, and turns around and lends that money to someone else (or sometimes right back to you). The difference between what they pay you and what they lend the money for is the cost of doing business – the fee you pay to them for taking the risk, investing your money and providing you with a return.
If you’re investing money in a managed product, such as an exchange-trade fund (ETF) or a mutual fund, some sort of fee is paid to the manager. These are usually charged directly to the fund. You’ll not likely see these fees, but they cover the cost of managing the investment and perhaps for the person or institution that handles your money. These fees can range from a tiny percentage of the money invested to a larger percentage, depending on the investment and what the fee covers. These fees are disclosed to the investor but are sometimes difficult to determine since they may only be expressed as a percentage of the account in the initial purchase documents. The annual amount you pay may not be reported directly to you.
With the advent of the new investment industry client relationship model (known as CRM2), disclosure rules on fees, any fee paid directly to the adviser or the firm you’re working with is reported annually. However, this doesn’t include the cost of managed products. That fee is reported in the management expense ratio (MER). You have to calculate this yourself.
Even with the purchase of a stock, there are fees. While there’s no ongoing fee built into the price of the stock, there’s a fee to make the initial purchase. Even with an initial public offering (IPO), a fee is built into the price. As well, the company whose stock you’re purchasing always retains some of the earnings to cover the cost of operations, investing in people, equipment, marketing and research to keep the company running.
With some investments, visible fees or sales commissions are charged at the time of purchase. And some accounts have regular management fees charged directly to them.
While fees are important, the most important thing is your return after fees and, of course, after taxes. So it’s very important when you look at the fees and costs associated with investing that you make fair comparisons.
For example, if you’re dealing with an investment adviser who is purchasing managed products for you, the fee on your annual report will likely not include what you pay to the company that’s actually managing the product. If you compared the reported fee to that charged by an adviser who manages an individual portfolio of stocks and bonds, the adviser-managed portfolio may appear to have higher fees. But when you compare total fees, it could often be much lower.
Shop around and make sure you’re aware of the total fees you pay and what you’re getting for them.
Bill Green is an hourly financial and estate planner, public speaker and author of The Success Tax Shuffle. Bill has over 25 years of experience in the financial services industry.
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