Who loves fees?
I think we can all agree that paying fees is right up there with getting a tooth pulled...at least in my opinion.
There are a lot of things that I would rather do with my money, even with as little as a $5 fee. I would rather get a blizzard or buy a couple coffees with that $5.
There are so many different types of fees out there! They are basically a tax for not paying attention or being well organized.
A tax for not paying your credit card on time or in full.
A tax for not paying your Cell Phone or Utility bill on time.
A tax for not returning your library book or any other kind of rental back in time.
A tax for not keeping a minimum amount in your bank account.
This is the opposite of my 10 ways to save $50 which could add up to $500
A tax for not being able to do your own research and learn how to invest on your own without a financial advisor.
This is the one that I'm going to focus on today. Last year, I wrote a satirical Goodbye to my financial advisor letter
So, in today’s blog I'm going to lay out what specifically I mean by fees when it comes to investing. I also did a Youtube video about Mutual Fund Fees but today I’m going to dive into a little more detail.
I think we are all aware that banks and financial advisors charge fees for investment products even poor investment products. The discount and other online brokerages also charge fees however, they charge significantly less.
Banks and Advisors can charge anywhere from 1-2.5% whereas, Discount Brokerages can charge anywhere from 0.08% to $10/trade when you go to sell your stocks.
So this may depend on your investment decisions and how often you buy or sell stocks.
Let me ask you a question, if you were currently shopping for a mortgage right now, which mortgage interest rate would you pick?
The lower interest rate of course!!
If your amortization period is anywhere between 10-40 years you definitely want a lower interest rate especially on an average $720,000 mortgage (yes, that's the average home price in Canada right now)
Now, let’s compare that to fee percentages as it applies to Investing. Unlike your Mortgage which you hope keeps decreasing in cost, there are investment funds for retirement which you hope keep increasing as you keep adding to the total amount. Perhaps even up to 1 million dollars after 20-40 years, maybe?
So if you wouldn't pay the bank 2.5% interest or fees on something that is going down in price, then why would you pay 2.5% interest fees on your investment that is going up in value/price??
Today, I want to show you a cool and handy calculator called the Mutual Fund Fee Calculator found on the Get Smarter About Money website put out by the Ontario Securities Commission.
Let’s use this calculator and use the example of wanting to invest at least $2500/month
for the next 20 years
at a 2.5% interest rate for fees
and a 9% interest rate of return
During the first 10 years,
you will pay $50K in fees
from your accumulated total investment of $490K
If, $50K in fees doesn't sound like a lot, what about the next 10 years, when you would pay $250K in fees from your total investment of $1,75Million.
In summary, you would pay a potential total of $300K in fees over 20 years out of the total $1.75 million that you earned.
This actually adds up to being 17% of your total Investment ($300K divided by $1.75 Million). Not really the 2.5% when we pretend to do the math in our heads.
And if the interest returns were only 9% after the 2.5% fees have already been subtracted and then you subtract another 4% for the new inflation than all that you are left with is a 5% return! If you were in the US, some have reported an increase to 7% inflation this year!
There is a second way of looking at these fees. Larry Bates has a book that I read about six months ago called Beat the Bank and it discusses investment fees.
Larry Bates even has a website www.larrybates.com where you can look at his T-Rex SCORES to see if an investment product is worth buying for your retirement, based on the score. He discusses how having a T-REX SCORE of 75% or more would make an investment product potentially worthwhile.
The only problem with this chart is that it doesn't allow to you to add an additional monthly contribution amount like the Mutual Fund Fee calculator does. Instead, you start out with a set amount to see how much money you would pay towards fees after a set amount of time based on the Fee percentage.
Another great use for the Mutual Fund Fee Calculator, is there huge selection of different investment products that you could compare and shop around like you would with a price match situation. This website also gives a great description of the different types of Sales Charges included with Mutual Funds within Canada that you may pay when you buy or sell units or shares of a fund.
"Front-end load or initial sales charge (ISC) – Some mutual funds charge a fee when you buy your units or shares. This is a percentage (up to 5%) of the amount that you are investing in the fund. The fee is paid to the investment firm that sells you the fund. You can negotiate this fee with your advisor.
Back-end load or deferred sales charge (DSC) – Some funds charge a fee of up to 6% when you sell your units or shares. Here’s how it works:
The longer you hold a fund with a DSC, the less you’ll be charged when you sell it. The fee declines every year according to a fixed schedule.
If you hold it long enough (usually between 5 and 7 years), you won’t pay a fee when you sell your units or shares.
Some fund companies may also let you take some of your money (usually 10%) out of the fund each year without charging you a fee.
Your advisor’s firm receives commission (usually about 5%) up front from the mutual fund company when you buy the fund. Your advisor receives part of this commission. Any deferred sales charge you pay goes to the mutual fund company.
Low load or low sales charge (LSC) – Low load funds charge a lower sales charge (up to 3%) when you buy your units or shares, and a lower redemption fee (up to 3%) when you sell them. You usually won’t have to pay a redemption fee if you hold your units or shares for at least 3 years.
No load – A no load fund doesn’t charge a fee when you buy or sell its units or shares. A no load fund may not always be a better deal than a load fund. You should compare the MER and performance of each fund before you decide"
(https://www.getsmarteraboutmoney.ca/invest/investment-products/mutual-funds-segregated-funds/mutual-fund-fees/)
Something to keep in mind when you are investing is that the fees will always be there but the performance of your investments will always fluctuate with the market.
Fees are guaranteed,
Performance is not!
When I initially transferred my funds from my Financial Advisor to Questrade, to try DIY investing, I ended up paying DSC sales charges which added up to approximately $700. I knew about the fees in advance, however, I felt like I made back that $700 plus more money within a couple months, by switching to a lower fee Index ETF.
Don't get fooled into thinking that someone else is a better investor than yourself!
You should care the most about where your money is going!
There are so many fantastic resources out there!
Including my Financial Coaching for beginner investors, check it out!
Now Go and Be Intentional about your Investing!