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“Don’t worry; I’ll take care of it”. This is a common line coming from financial advisors. They will surely “take care” of your investments, give you financial advice and, if you are lucky, prepare a full financial plan with investment projections, advice on your financial situation including several areas such as legal, retirement, insurance, protection, estate planning, etc.
However, when you look at your investment statement, you shouldn’t look only 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”, “fixed fee”, “cost”. If you can’t find them, go back to your financial advisor and ask a simple question: “how much do I pay you to manage my money?”.
Ohhh…. It’s the same fee found at any kind of institution. BS! There are actually several ways for financial institution to charge their investment management fees. Today, we will look at different types of ways to charge clients while we will take a closer look at each of them on separate articles.
Management Fees (MERs)
You will see these fees if you own mutual funds. It is basically the fee paid to the fund manager in term of a percentage. For example, if the MER of a mutual fund is 1% and you invest 100K, and the fund manager couldn’t generate any additional gains and your investment is still worth 100K, the company then charges 1% of 100K as management fees anyways. 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 MERs. 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 charging a percentage of the managed asset. The more it grows the lower management fees become. On the other hand, if your investments drop, the fund manager will receive a higher percentage but a lower amount in terms of dollars for his work.
This type of account usually shows investment yield before management fees. Here again, it is very important to clarify how the investment yield is reported 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 cost attached to the transaction. This type of account was very popular a few years ago. Brokers were trading for clients as if they were day traders simply to generate extra commissions for their pockets. This trend has started to disappear since trading accounts pushing low trade commissions are becoming more popular.
Loads
There are several other fees related to mutual funds and they will be discussed in a further article. Right now, you can still call up your financial advisor and ask him if you have front load or back end load fees 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.
