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Dude, Where's My Fees?

My introduction into investing was with a big bank mutual fund. I was in university and knew as much about investing as Jon Snow knew about anything. I had some idle savings and was told it was the smart thing to do.

At the time, I had one bank for my credit card, checking account and savings account. Naturally I went to the same bank for investing (they'll take care of a loyal customer, right?). I sat down with an advisor, signed some forms, deposited my money and bam! I was an investor. The process was quick and I left knowing as much about investing as when I walked in.

During the setup process, there was no mention of fees, and no fees were to be found in the statements neither. Innocently, I assumed there was no fee. This is what most people think about their mutual funds. Nope.

The fees are found buried in your prospectus - the fund's terms and conditions. And like most terms and conditions, they're long, complex and you didn't read them. The fees are known as the management expense ratio (MER). The MER is paid out of the fund assets, never to be seen by you. You pay indirectly through the reduction of your investment's value.

Mutual funds typically charge 1% to 2%. This might seem like a small percentage but will have a huge impact over time.

We can demonstrate this with an example:
  • You invest $10K into a mutual fund
  • MER is 1.5%
  • The fund grows for 30 years, earning 7% a year
With no fees, your investment after 30 years would be worth $80k.

Add the MER of 1.5% to the picture, you'll be left with only $50K.

The 1.5% fee would have cost you $30K, which is 40% of your potential investment!

It is important to understand the impact fees have on your investments. Obviously you can't expect folks to work for free but you should ask yourself it's worth it. Are you receiving anything of value? Advice on budgeting, taxes, estate planning, anything?

In my situation, there was no advice and the cost wasn't worth it. If you are going to be paying fees, consider the impact they'll have to your long term wealth and make sure it's worth it.


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