Saving & Spending

There was a temblor in Toronto on Friday, May 18. It shook no buildings, broke no glass and no one died. Nonetheless, aftershocks rumbled through the financial district. The cause could be found deep in the belly of the mutual fund beast. That day, Investors Group, one of the largest purveyors of mutual funds in Canada, reduced fees after reporting year over year net sales had plummeted by 65 per cent.

If you aren’t an Investors Group client why should you care? Here’s why. Though industry insiders have been expecting something like this from Investors Group, the announcement is actually an indication that the entire mutual fund industry is struggling. Investors Group, part of Power Financial Corporation, bowed to increasing pressure from investors to slash fees on funds in the face of competition from the rapidly expanding suite of much cheaper Exchange Traded Funds (ETFs) now available in Canada.

In addition, investors are finally wising up to the fact that high fees do not equal stellar performance. In fact, the reverse is often the case. This has been well known for decades but the fund industry generally, and Investors Group in particular, has cleaved to the notion that higher fees are justifiable because you get advice bundled with the product.

The industry has been able get away with promulgating this line because the average investor doesn’t know how to evaluate either performance or advice. The commission-based person selling the product isn’t about to tell you that the expensive funds littering your portfolio are overpriced and underperforming.

All mutual fund investors can improve their investment performance merely by ensuring they are paying the lowest possible fees. The simple truth is that the lower the fee hurdle the more likely you are to see investment gains.

Here are six tips to help you on the road to a low-fee mutual fund portfolio.

1. Get the facts. Before you buy, or buy more, of a given mutual fund get details of the Management Expense Ratio (MER). The MER is annual, by the way, and you will pay it as long as you own the fund. Included in the MER is a trailer fee (between .25 and .75 per cent) that goes to the sales person and/or the firm. Then compare those fees to the following category averages compiled by Toronto-based Investor Economics in September 2011.

• Money market 0.44%

• Fixed Income 1.44%

• Balanced 1.98%

• Equity income 2.06%

• Core equity 2.26%

• Fund of funds 2.15%

2. Don’t get hog-tied. Deferred Sales Charges (DSC) tie you to a mutual fund until the DSC fee schedule runs to zero, usually six or seven years. This means that if you have a bad fund you are more likely to hang on to it because consumers hate to pay money to exit an investment. Avoid funds with these extra fees.

3. Put all your money to work. Front-end load fees are equally damaging to your investment returns. If you pay an up front fee of 5 per cent (which is typical) and you invest $10,000, only $9,500 of your money is working for you. Assuming a 5 per cent annual rate of return, the first sum will amount to nearly $88,000 after 15 years while the second will finish at $83,500. Avoid funds with front-end load fees.

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4. Negotiate. These days, with low-fee competition pounding at the mutual fund industry’s door your adviser should be willing to negotiate down fees. This is especially true for those with larger amounts to invest or who have been with an adviser for some time.

5. Search out lower fee funds. DIYers with discount brokerage accounts should not be paying the same fees as those using full service advisers. Some fund companies have low-fee versions of their funds, RBC’s D Series or TD’s E Series, for example. Looking up a fund on can help you winnow out cheaper versions. Also, if you are working with a fee-for-service adviser you should be buying F Series funds that are stripped of trailer fees and sales commissions.

6. Vote with your wallet. If your fund is a sad sack or even middle-of-the-pack performer but the fees are on the high side, find another fund. Don’t hang on to a dog just because you don’t want to pay the exit fee. Far better to dump the fund and take the loss, then you can select one that is higher quality with lower fees.

There are thousands of mutual funds on the market; many are excellent and inexpensive, so there is no reason to pay high fees for poor quality.