Low Fees Make a BIG Difference
When looking at your personal finances, determine your risk profile and take the time and effort to do research on your own, meet with your advisors, with a goal to have the best net returns over time. Although there are many things people can do to try and increase the performance of their investments, they might be overlooking one of the most important aspects of investing. Fees. High, and even moderate, annual fees can have a detrimental effect on your net investment returns, and you may not even be aware of it. Thankfully, this is something investors can analyze, change and adjust. We want to explain why you should be taking a good look into the fees you are paying.
To make sure we are all on the same page, let’s discuss the specific fees we are talking about. When investing in mutual funds, you will often be charged a Management Expense Ratio (MER). This fee bundles together all of the different fees that the fund manager charges, such as management, administration and operating fees.
In Canada, all fees must be disclosed by law. This means, your investment firm or advisor needs to make you aware of the fees you are paying. However, as your investment grows year to year, so will your fees grow along with it as the fees are most often a percentage of assets under management. You need to continually revisit how much you are paying in fees and make sure to ask questions if you don’t understand completely. By making adjustments or changes to the fees you pay, a small change could save you thousands of dollars a year.
Professor Eugene F. Nama, an American economist who won a Nobel Prize, found that approximately 97% of fund managers do not beat market indexes net of fees. This finding explains that, more often than not, your best bet is to find a low-cost fund that tracks a leading equity index because, over longer periods of time, this will nearly always beat the fund manager who is actively trading.
To show the effect fees can have on your investment, we have compared three investments. All three are $100,000 investments over a 10-year term and generate a 7% annual return. Although each of the funds has a different MER, they are 0%, 1%, and 2%.
Looking at this comparison, it is easy to see how much of an effect a 1 or 2% MER fee has on your investment returns over longer periods. A great way to avoid paying high fees that affect your annual returns is to find a fund or investment that has a one-time fee payment (preferably at the end of the investment term so that annual returns keep compounding without deduction of fees). Fees that are taken annually reduce the amount invested the following year and hence, due to the power of compounding, result in a much lower net return at the end of the investment term.
The Bottom Line
Understanding what fees you are paying is extremely important. We urge everyone to take a look at the fees you are paying annually and look at the impact the fees have on your net returns. You may be surprised when you are being told the market is going up, but somehow your investments aren’t keeping the same pace. Do what you can to lower the annual fees you are paying or find an investment that doesn’t charge annual MER fees.
If you have any questions or wish to talk to an advisor, please reach out to me, Brian Moylett, at firstname.lastname@example.org, or call/text at 778-951-2806. I would be happy to answer any questions you may have about the effect of MER fees and, if you wish, assist you in finding an investment with no annual MER fees, so you can be sure you are earning the most on your investment at the end of the day.
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