Fees - Part One: Investing in Mutual Funds - Load Fees

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Our industry is in an unprecedented time of change. Many of these changes will impact the way that people interact with their Financial Advisors. We believe that these changes are extremely positive and welcome the added transparency that our clients will enjoy.

 

The next big change will come in January of 2017. Our regulatory body, the Investment Industry Regulatory Organization of Canada (IIROC), has requested that each institution that deals with individual investors provide a statement that describes the following:

 

  1. The original amount of money invested
  2. The increase (or decrease) in the value of these investments
  3. Fees paid to your advisor* in dollar terms.

This will be effective since the start of your relationship, or January 1, 2016, whichever is later. This will be the first time many investors get to see how much they have paid in fees and what total return they have experienced in the year.

 

We have always tried to be as forthcoming to our clients as possible with respect to the fees that they are paying in order to invest and receive our advice and planning services. With that, we are excited to be able to provide our clients with this important information in January.

 

Fees are always an important consideration when making any major financial transaction. When selling a house or property, the fees may range from 1-4% of the value of the house/property.

 

Depending on your advisor, their institution and the size of your account, fees paid to your advisor can vary greatly.

 

Today’s discussion will focus around investing in mutual funds and the various methods for purchasing a fund.

 

A great guide to the fees investors pay can be found on the “Thinking out Loud” section of our website. Mackenzie is a mutual fund company that many of clients invest with. I will continue to reference specific pages of the document that you can review at your leisure.

 

The first type of fee is the commission that some advisors charge in order to buy a mutual fund. These commissions are typically unknown to many investors, and will entirely depend on the type of commission “load” that you and your advisor select. Information can be found starting on page 12 in the Mackenzie document. There are three different ways that your advisor can be compensated when you purchase a fund:

 

  1. Deferred Sales Charge (DSC) is quickly becoming a thing of the past, but a few advisors are still selling mutual funds on this load. As you can see in the Mackenzie document on page 13, the DSC load includes a 7 year time horizon until your mutual fund would be eligible to be sold without a fee. The advisor who sells this type of load is compensated 5% of the value of the investment directly from the mutual fund company. As an investor, you don’t pay anything directly out of pocket for this transaction but the fee you may pay if you were to sell it acts as a cost recovery for the mutual fund company.
  2. Low Load (LL or LSC) is the same concept as DSC, but with a shorter time horizon until your investment is eligible to be sold without a fee. Typically Low Load mutual funds can be 2 years (LL2), three years (LL3) or four years (LL4) in length until you could sell these investments without a penalty. Your advisor may be compensated 2-3% at the time of the investment for this type of load, and again you wouldn’t pay anything out of pocket.   
  3. Front End Load (FE or ISC) is becoming more common, and serves as the only way we offer mutual funds to our clients. In this load, advisors charge their clients directly for the investment. This typically is deducted directly off of the value of the investment at the time of purchase. The commission charged varies depending on the advisor you are working with, but you can negotiate a commission rate from 0%-5%.

As a summary, have a look at this table:

 

 

We have committed to our clients to purchase mutual funds on a Front End basis at 0%. We believe that our clients should have access to their money when they need it, and we always strive to keep fees as low as possible. This means that you will not pay anything to purchase the investment, and will not incur a fee to sell your investment.

 

As with all fees and commissions, your advisor will not typically receive all of the fee that you pay. The institution your advisor works with may take up to 70% of the fee you pay your advisor for the services they provide.

 

The next topic we will review will be trailer and management expense ratios (MER). If you have any questions regarding this blog post or would like to see another topic covered, please don’t hesitate to contact us.

 

At the end of the day we encourage people to open their statements in January and think about the service and value they are getting for the money that they paid over the year. It is our belief that our financial planning, risk-appropriate investment products and comprehensive service model adds value to each one of our clients.