Wednesday, August 10, 2016

Do You Pay Investing Fees?

Now that phase 2 of the new Client Relationship Model (CRM2) is fully in effect, we have new possible answers to the question “do you pay investing fees?” Here is a list of possible answers to this question in roughly increasing order of investor knowledge, including two that are specific to the CRM2 changes.

No, there are no fees with my mutual funds.

Blissful ignorance.

No, the mutual fund company pays my advisor.

Not thinking it through. Why would the mutual fund company pay your advisor with anything but your own money?

My mutual funds used to be free, but my latest statement has a bunch of new fees.

Not realizing that the fees were always there.

Yes, but it’s just 2% or so.

Not understanding that the fees compound to big money. Might think that the 2% applies just to returns rather than the full amount of your savings every year.

Yes. I thought the fees were small, but my latest statement shows they’re much more than I thought.

Seeing the amount in dollars has much more meaning for most people than percentages. I’d like investors to see the dollar cost of the mutual fund’s entire MER, but showing advisor compensation is a start.

Yes, but you have to spend money to make money.

That’s an expression that applies in many areas, but not investing. All the evidence says that professional money managers very rarely earn excess returns that make up for all the costs investors pay.

Yes, but what choice is there but to pay the high fees?

Understands that fees are high, but isn’t aware of lower cost options.

Yes, but I keep fees to a minimum.

Has found a low cost approach. There are a number of possibilities here:
  • A low cost mutual fund company that offers some advice directly instead of paying commissions to advisors.
  • One of the new breed of advisors who keep costs low.
  • Robo-advisor.
  • Do-it-yourself approach.

I’ve encountered people at each point in this spectrum of answers. Are there any other common answers to this question about fees?


  1. You are a "Investing Whisperer" with these one-liners. Keep up the good work!

  2. Someone I met was under the impression that the 2 percent MER was a one off fee.

    Also, "my advisor who recommended a high fee fund he sells van be believed because he goes to the same church."

    And "he only did it as a favour because normally they take only high net worth individuals"

    1. @BHCh: Those are two common sales techniques: joining your church or other group and making you think you're being treated in a special way.

    2. And it was a working man in his 60s with his whole fund worth about 90k. He was sold a crappy mutual fund with 2.5% MER while being under impression that it's a one off charge. Immoral if not criminal.

    3. @BHCh: Perhaps it included a one-time front-end load in addition to the bloated MER.

  3. I would love to hear the advisors who try to pass off the disclosure as a new fee to hide the fact that it was happening all along...

    "You know, I told them up at head office that we can't do this, clients will hate it, but you know how it is. They just don't listen sometimes. I mean don't they understand that we'll lose all our clients if we don't give this away for free? How are we supposed to stay in business. Well you know my hands are tied at this point, it's company policy. And everyone else seems to be doing it too. But you know what, let me tell you about this new fund with a higher return to help you earn back those fees..."

    1. @Richard: It would be funny to catch someone saying this type of thing on tape.

  4. MJ, I think you're missing, "Yes, but it's worth it to me", which is a more positive take on "..but you have to spend money to make money". You don't have to, but you can, given your personal circumstances, choose to.
    Case in point, we invest with an advisor who charges an annual % fee, is and has always been very transparent about it, and refunds the trailer fees he receives in the odd instance he invests some of our portfolio in an investment that pays him back. We find it worth it for 2 reasons. The major one is he also does our taxes (for no extra cost), deals with all the tracking/admin needed *and* optimizes what is held in what account, tax-loss selling etc. with tax optimization in mind. The minor one is knows when to go an added level of complexity to save money, e.g. set up a bond ladder vs holding a bond fund, etc. Is it worth it strictly from a $ point of view -- not sure. Am I happy I can engage on fin topics on your blog or elsewhere whenever I want, but don't *need* to pay attention to specific nitty gritty in December and April - you bet.

    1. @Martin: That's not an answer I encounter. I hear many people say they're happy with their advisors, but these people usually either don't know what they pay or they fall into the last camp of those who have found a way to reduce costs.