DAILY FINANCIAL TIPS – DAY 39 – INVESTING COSTS
There are many different investment options people can take advantage of. Each has their pros and cons. One can purchase specific stocks and bonds, many purchase Mutual Funds for their investments. One can engage the services of an investment advisor from a brokerage firm such as RBC Dominion Securities, ScotiaMcLeod, BMO Nesbitt Burns, etc. You can use an online brokerage such as Qtrade, RBC DirectInvesting, TD Direct Investing, etc. Many will use investment advisors at banks and credit unions. Each service has different cost and fee structures and many will also have minimum account sizes. Below are some cost considerations to be aware of when choosing investment options.
Most Discount brokerage firms have minimal ($25 – $100/yr) or no annual fees to hold investment accounts. The fees may be incurred if accounts are below certain account balances. Banks and credit unions will generally not charge fees to hold mutual funds, however there may be some fees to hold third party mutual funds. Investment advisors at full service brokerages will generally charge an annual fee for their services and have minimum account sizes (can range from $100,000 to $250,000 minimum).
In addition to fees to hold accounts, there are also different transaction fees or mutual fund costs that can affect rates of returns and values. Discount Brokerages will charge transaction fees for purchasing individual stocks and bonds. These fees are published on their websites. Full Service brokers also charge transaction fees for purchasing individual stocks and bonds.
Mutual Funds can have a variety of fees which should be disclosed when purchasing the investments. In general, mutual funds can be bought one of three ways: Deferred Sales Charge (DSC), Low Low (LL) or No Load. These are sales charges designed to compensate the advisor for their advice. The costs are incurred if the mutual fund investments are redeemed/cash before a specific period of time. Deferred Sales Charges are a sliding scale that declines over a 7 year period. Usually a fee of 7% will reduce to 0% over the 7 years. Low Load fees are generally a sliding fee ranging from 4% – 0% over a 3 year period. No Load fees provide the option to charge no fees to higher fees. Generally No Load fees are sold without fees. If not sure if fees apply to your existing investments, check your statements and ask your advisor. When purchasing mutual funds, ask about fees prior to purchasing mutual funds.
In addition to sales fees/charges identified above, mutual fund companies will charge all their holding Management Expenses (MER) which represent their investment management fees, overhead (ie rent, heat, power, etc), and transaction fees (costs of purchasing and holding the investments). These fees will vary depending on the nature of the investment. In general, bond investment MER are lower than stock investments. MER fees are to be disclosed by the mutual fund companies. Rates of returns that are published are generally done factoring in MER or net of MER costs.
There are many investment choices and many different options for investment advice. As with anything in life, there are costs associated with the different delivery options. Likewise, as with most things in life, you tend to get what you pay for – the higher the cost, the higher the level of advice and greater investment options available. Explore the delivery channel that best suits your level of knowledge and level of engagement you wish to have.
These daily financial tips are designed to be short ideas covering different aspects of family and business finances. They are short pieces intended to provide information to enable individuals, families and businesses to make informed financial decisions. Not all tips will apply to every situation, but over the course of a year, most financial topics will be covered. Check in regularly and share with friends and associates.