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“Don’t worry; I’ll take care of it”. This is a common line for financial advisor. They will surely “take care” of your investments, give you financial advice and, if you are lucky, do a full financial plan with investment projection, advices on your financial situation on several points such as legal, retirement, insurance, protection, estate planning, etc.
However, when you take your investment statement, you should not only look at your net return. In fact, you should climb up the mountain of numbers on this little piece of paper until you see something like “management fees”, “MER’s”, “fixed fee”, “cost”. If you can’t find them, go back to your financial advisor and ask a simple question: “how much to I pay you to manage my money?”.
Ohhh…. It’s the same fee for any kind of institutions. BS! There are actually several ways for financial institution to charge their investment management fees. Today, we will look at different type of ways to charge clients while we will take a closer look at each of them on separate articles.
Management Fees (MER’s)
You will see those fees when you have mutual funds. It is basically the fee paid to the fund manager in term of a percentage. For example, the MER’s of a mutual fund is 1% and you invest 100K. At the end of the year, if the fund manager could bring any value and your investment still worth 100K, the company charge 1% of 100K as management fee anyway. Therefore, you will end up with a negative return of -1% and your investment statement will show 99K.
There is usually two ways of presenting your investment yield: before management fees of after management fees. This is really important that you ask your investment representative if your statement shows a yield net of MER’s. This could make a huge difference.
Asset Based Management Fees
This is a similar way to charge management fees on a client account. In fact, the financial institution is charge a percentage of the managed asset. The more it grows the lower management fees become. On the other side, if your investments drop, the fund manager will receive a higher percentage but a lower amount in term of dollar for his work.
This type of account usually shows investment yield before management fee. Then again, it is very important to clarify how much the investment yield reporting and the management fee structure.
Asset based management fees are usually very interesting for large and active investment account.
Cost Per Transaction
Another way to charge a client account is to require a transaction fee. You will this type of account when you have a broker that trades stocks or bonds. Each time he buys or sells a stock, there is a transaction cost attached to the transaction. This type of account was very popular a few years ago. Brokers were making client trade like they were day traders simply to get the commission in their pocket. It now tends to disappear since we have trading accounts pushing commission on trade to a lower level.
Loads
There are several other fees related to mutual funds and those will be discussed in a further article. Right now, you can still come up to your financial advisor and ask him if you have front load or back end load fee on your mutual funds.
As you can see, there are several ways to charge an investment account. In a further post, we will look at the advantages and disadvantages of each of them.
