Stop fussing about mutual fund fees and get some facts to judge your returns

One of the side effects of investors becoming more savvy about fees is a condition we’ll call mutual fund angst.

It works like this: An investor learns more about fees and realizes that mutual funds are a comparatively expensive way to invest. This often produces an impulse to get out of those mutual funds and sever the relationship with the adviser who sold them. Here’s a sample of this kind of thinking from a query sent recently by a reader: “How does one extricate oneself from long-standing mutual funds if they are no longer a good idea or a long-standing relationship with a particular banking adviser?”

The extrication process couldn’t be easier. Just find a new adviser, ask to have your old account transferred over and then decide which of your exiting mutual funds to sell. It’s quite possible to set this in motion without ever confronting your old adviser.

But is extrication the right move? You need facts to answer this question, not just an uneasy feeling you own mutual funds that aren’t worth the fees.

A lot of funds are not worth the fees you pay to own them. I delved into this last year in an analysis of the largest 100 Canadian mutual funds. But you don’t sell funds just because they’re funds. There are plenty of good to excellent funds that can help you realize any financial goal you can think of and entirely justify their fees.

If you’re feeling mutual fund angst, you need facts to decide what to do next. Using a resource such as Globeinvestor.com or Morningstar.ca, take a look at:

• How the short-, medium- and long-term returns of your funds compare with peer averages and the appropriate stock or bond indexes: Mutual fund returns are shown after fees, which generally include a portion that goes to advisers and their firms for services provided to clients. Chop 1 per cent off index returns to get a fair point of comparison with your mutual funds. Also, put much more emphasis on returns for five years and longer. One-year results don’t mean a lot.
• Down-market performance: One way for fund managers to add value for investors is to blunt the worst of a bear market. Did your Canadian equity funds lose less than the S&P/TSX Composite Index last year? If not, have you been compensated by extra strong returns in up markets?
• Holdings: Does your fund have different weightings and holdings than its benchmark stock or bond index? If not, you might as well hold a cheap index-tracking exchange-traded fund.

Next, consider the value of the services provided by your adviser. If you have a financial plan and are confident you’re on track to meet your goals for retirement and more, then you’re getting something for the fees you pay.

Paying hefty fees for weak funds and getting no advice? Now that’s good reason for mutual fund angst.