CBC News Posted: Feb 28, 2013 8:29 AM CT Last Updated: Feb 28, 2013 8:26 AM CT

With the March 1 deadline for 2012 RRSP contributions looming, some people may be rushing to buy mutual funds to get the tax deduction.

Five Fee Fixes

Small-investor advocate Ken Kivenko has made these suggestions for improving the system:

1. Eliminate all GST taxes for mutual funds.

2. Require advice component of mutual fund fees to be separated from fund management component.

3. Move the mutual fund industry toward a client-first model, away from a system where sellers have vastly more information about the product than buyers.

4. Introduce a new, voluntary Canada pension plan that would have low fees.

5. Add mutual funds to NAFTA, which could save Canadians billions of dollars in fees annually, because they could buy more U.S. mutual funds.

_{Source: Presentation to Senate Standing Committee on National Finance}

But financial watchdogs say people should be wary — many of those funds charge their customers high fees. Canadians tend to get hit with higher investor fees than residents of other countries.

Those fees are in the fine print, with names like management expense ratios and trailing commissions — back- and front-end fees. All of them are designed to give a mutual fund advisor a cut of the customer’s profits.

Some investors, such as Saskatoon’s Ginette Kamieniecki, admit they have only a vague idea of what’s being charged.

I haven’t really noticed anything high, but maybe if I paid attention. I don’t know, she told CBC News.

But according to Ken Kivenko, a small investor advocate and writer, these fees shave an estimated $25 billion a year off what Canadians are trying to save.

Every year, a certain per cent comes off it. And over 20, 30 years what people don’t realize that what sounds like 2½  per cent really can reduce the amount you’re going to get by half.

According to Kivenko, 2½ per cent might have been easier to swallow when the markets gave 12 per cent returns, but that’s not happening right now.

When the market’s making 5 or 6 per cent and you’re paying 2½, and you’ve got taxes and inflation, basically you’re ending up with nothing, he said.

Right now, financial advisors don’t have to tell their clients all the ways they make money from mutual funds.

Kivenko believes that should change, with better rules for disclosing fees that provide answers in dollars and cents.

Five tips on how to make the most of mutual funds:

1. Avoid Deferred Sales Charges. These tie customers to mutual funds until a fee schedule ends. Some are two or three years, some last as long as seven years. It could lead to hefty charges to get out of a money-losing fund. Some advisors say they won’t even sell these anymore.
2. Avoid Up-Front Fees. If you have $10,000 to invest, a typical five per cent ‘up-front’ fee would mean you only get $9,500 of your dollars working for you. This will hamper potential returns.
3. Negotiate with your advisor.  Some advisors charge by the hour, making it clear what you are paying for. In these cases, pay close attention to any mutual funds that have additional fees and commissions. 
4. Examine existing funds. If you already have a fund with fees, look at how that fund is performing after taking into account the fees you pay. If your fund is not doing well enough to justify the fees, consider dropping it.
5. Be careful with ‘do-it-yourself’ services. Services that do not include an advisor may still involve fees for the funds you choose, on your own. Also, watch the frequency of your activity as individual transaction fees can add up.

(Sources: Canadian Fund Watch; Ontario Securities Commission; CBC Marketplace)