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How do investing costs hurt returns? Let us count the ways

Fees are the silent killers of investment returns. Many investors are only dimly aware that fees even exist, but over the long term, fees can cause serious damage to a portfolio.

Consider that $100,000 invested at 8 per cent for 25 years will grow to $684,847. Take off just 2 per cent in fees and that same $100,000 will grow to $429,187 - a difference of $255,660.

Studies show that about half of mutual fund investors have no idea they're paying any fees at all. What's more, those that are aware of fees often believe that higher costs are the price for higher returns, when in fact keeping costs low is the key to successful investing.

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Investor Education on mutual funds:

  • What will it cost to invest in mutual funds?
  • Feeling ripped off, investors? You're not alone
  • Should I buy my mutual funds from the same fund company?
  • How do I sell mutual funds?
  • How do I put more money in my mutual funds?




With that in mind, today's Investor Clinic provides a comprehensive list of the many fees and other costs investors face. This information comes from the Investors-Aid Guide to Protecting Investment Returns, by Garth Rustand, a former investment adviser who runs the Vancouver-based Investors-Aid Co-operative of Canada.

"To manage your investment costs, you need to know what they are. The investment industry charges at least 18 different types of fees, and taxes add a 19th," Mr. Rustand writes.

"Some costs are transparently disclosed on investors' statements, but many are hidden. Some are non-negotiable, while others can be waived upon request."

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See how many of these costs you are paying:

1. Stock-trading commissions. When you buy or sell a stock or exchange-traded fund, you pay a commission ranging from less than $10 at some discount brokers to $150 or more at full-service firms. The more you trade, the higher your costs. Mutual funds that trade a lot also have higher expenses.

2. Fixed-income commissions. These costs are built into the price of bonds, T-bills and even guaranteed investment certificates. Because investors often don't see these costs, they assume - incorrectly - that they aren't there.

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3. Initial public offerings. No commission is charged on new stock issues, but a premium is added to the price to compensate the seller.

4. Management expense ratio. Expressed as a percentage of assets, the MER of a mutual fund or ETF includes the management fee, operating costs and trailer commissions paid to advisers. The average MER of an equity mutual fund in Canada is about 2.5 per cent.

5. Performance bonuses. Some actively managed funds pay performance bonuses to managers if they beat their benchmark. This may cause the manager to take additional risk.

6. Front-end loads. Some mutual funds charge upfront sales commissions ranging from 1 to 6 per cent. This commission is often waived if the investor asks.

7. Mutual fund switch commissions. Jumping from one fund to another can result in a charge of 1 to 3 per cent. This fee is also often waived upon request.

8. Deferred sales charges. One of the sneakiest types of fees, DSCs - also known as rear-end loads - are charged when an investor redeems a fund before a certain number of years has elapsed. The fees decline from a high of about 6 per cent down to zero after six or seven years.

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9. RRSP administration fees. Depending on the size of your registered retirement savings plan, you could be paying an annual fee of $50, $100 or more.

10. Listed unit management fees. Closed-end funds charge annual management fees, which can be as high as the MER of a mutual fund.

11. Asset-based fees. Instead of working on a commission basis, some advisers and portfolio managers charge clients a flat percentage of assets - often 1 to 2 per cent - annually.

12. Layered fees. Investors who hold mutual funds in an asset-based account pay the mutual fund MER plus a percentage fee to their adviser, so it's important to hold only low-cost funds in such accounts.

13. Fee-for-service. Some financial planners charge on an hourly basis for drawing up financial plans.

14. Tracking fees. Some planners charge a fee to track multiple portfolios at different financial institutions.

15. Transfer fees. When you move an account from one institution to another, the sending institution charges a "transfer-out" fee. The receiving institution will often reimburse you for this fee if you ask.

16. Liquidation costs. When an adviser at a new institution takes over an account, he or she may decide to sell investments to buy other products. Liquidation costs "can easily wipe out an entire year's return," Mr. Rustand says.

17. Capital gains distributions. When a mutual fund distributes capital gains, the money is taxable in non-registered accounts.

18. Price spreads. For illiquid stocks or ETFs, the price you pay to buy will be higher than the price you'll get when you sell, all other things being equal. Mutual funds that buy or sell large blocks of stock can also cause price spreads to widen, adding to costs.

19. Taxes. Some mutual funds turn over 100 per cent of their holdings every year, which means investors lose about 25 per cent of their returns to taxes. "The most tax-efficient products are index funds or units. They have almost no turnover and let you compound your capital gains indefinitely," Mr. Rustand says.

Is there an investing fee or cost we've missed? Let me know about it. jheinzl@globeandmail.com

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About the Author
Investment Reporter and Columnist

John Heinzl has been writing about business and investing since 1990. A native of Hamilton, he earned a master's degree from the University of Western Ontario's Graduate School of Journalism and completed the Canadian Securities Course with honours. More

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