One popular New Year’s resolution is to save money. There are numerous ways to reduce expenses for various household expenditures and today we will focus on possible ways to reduce the amount of fees that you are paying on your invesment portfolio.
Individual stocks have brokerage fees, individual bonds have commission costs to buy or sell, mutual funds have management expense ratios, ETF’s have fees, wrap accounts have a different cost structure and fee based accounts require you to write a monthly cheque; how are you able to know exactly how much it is costing you to hold a specific investment and how much you are paying your advisor? These can be two separate and easily distinguishable costs, or they can be co-mingled and, therefore, more difficult to determine.
The fees that you pay must be transparent and not a hidden cost, and, if you are giving up a feature of a mutual fund purchase, you must be made aware of the pros and cons of your decision.
For example, a mutual fund can be purchased a number of different ways: Front End — you pay a certain percentage of your investment up front, there is no lock in period and your funds are fully liquid (except for a possible short term trading cost), Back End — there is no upfront cost to purchase the fund and the funds are locked into the fund family, typically for six to eight years, Low Load — there is no upfront cost for the investor and the funds are locked into the fund family for two to three years. While the zero upfront cost may seem the most cost-effective solution, it is important to be aware that the lock in period can be costly if you have to make a withdrawal before the locked period is up. This can be expensive if you need the funds for an emergency or you wish to change your investment strategy.
The amount of advice that you are actually receiving is another factor to consider. You may be paying full service fees, but not receiving full service from your advisor. Fees also affect the overall yield your portfolio generates, one per cent per year may not sound like a lot, but over time this can amount to a sizable number.
You have to pay fees even if your portfolio loses money for the year, so it is important to understand the cost of investing and that you are getting your money’s worth, in advice and in service.