In these challenging economic times, it is more important than ever that you know what you are really paying in various fees and commissions for your investments — and finding out what level of service you can expect for those charges.
Mutual funds are among the most popular investments that Canadians make, but they have costs that very few people really understand. When you buy and sell mutual funds you may pay a sales charge, called a “load”. There are 3 types of load mutual funds:
Front-End Loads (FEL): These sales charges range between 0 – 5% of the amount of the initial investment. You pay this upfront commission when you purchase the funds and you may be able to negotiate the rate. The advantage of a front end load is that it is a fixed amount. You know how much money you have to invest, so you know the fee.
Back-End Loads (also called Deferred Sales Charges or DSC): You pay this fee when you sell your mutual fund. Back-end loads range from 1% to 8% of your investment and it may be based on the original purchase value of your investment, or the market value at the time of sale. This fee usually declines the longer you own the mutual fund, reaching zero after a period of time – usually 6 or 7 years. Ask your advisor and read the prospectus for a schedule of charges as this will tell you how long you must hold the mutual fund before the back-end load reduces to zero.
No-Load: Often banks and credit unions won’t charge a fee if you invest in their own funds. You can also buy no-load mutual funds directly from the company that manages them. Companies like Phillips, Hager & North, Leith Wheeler, Steadyhand or Altamira offer no-load funds. But read the prospectus, sometimes no-load mutual funds have a minimum investment requirement. Although not all mutual funds have a sales charge (e.g. no-load funds), all mutual funds charge a fee for ongoing management and administration of your investment.
Management Expense Ratio (MER) is the annual fee charged by mutual fund companies to investors. It covers expenses such as investment management, marketing, accounting, administrative costs and fees to investment salespeople. MERs typically range from 0.05% (usually for lower risk investments such as money market funds) to more than 2.5% (usually for Canadian and international stock funds). You can find out about the MER in a fund’s prospectus or by asking your advisor.
Mutual funds can play an integral role in a balanced investment portfolio, but only if you are fully aware of all the costs and charges that are associated with them. Ask questions! – Karin Mizgala
Karin Mizgala is a Vancouver-based fee-for-service financial planner with an MBA and a degree in psychology. She’s the co-founder of the Women’s Financial Learning Centre.