Dale Jackson

Personal Finance Columnist, Payback Time

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ANALYSIS: Over the next year mutual fund investors burdened by the highest fees in the developed world will finally get to see how much they pay to invest in dollars, instead of in percentage terms.

Well, not the whole amount. Actually, not nearly the whole amount.

They will only see the dollar amount of the portion that the advisor firm takes, which includes a trailer fee of about one per cent. The total amount of invested assets skimmed off by mutual fund companies, known as the management expense ratio, will still be expressed as a percentage. For a typical mutual fund that’s 2.5 per cent. Simple grade eight math translates that into $25,000 on a $1-million mutual fund portfolio, each and every year.

It’s not the math challenge keeping MERs from being expressed as dollars. Dollar figures have a tendency to shock and that’s probably why the investment industry has dragged its heels to this point in the forced disclosure process.

That’s not to paint all mutual funds with the same brush. Some have competitive fees, and some justify the higher cost through good management and higher returns.

That doesn’t change the fact that, over the long term, the average mutual fund underperforms its benchmark by about the same amount as the fee.

If you’re looking to break free from mutual funds here are some alternatives:

1. Fee-based advisors will help you create a portfolio of investments geared to your specific goals and risk tolerance – like a mutual fund just for you. The fee is typically one per cent or 1.5 per cent depending on the amount under management. Most fee-based advisors, however, will only accept wealthy clients – usually with a minimum of $500,000 to invest. It stands to reason that one per cent of $1 million is much higher than one per cent of $300,000. A fee-based advisor would need to take on several smaller clients to make a living – minimizing the amount of time spent with each individual.

2. Fee for service advisors are paid much like lawyers. An investor pays a flat fee for the advisor to construct an investment portfolio and pays a fee for each visit to review or update the portfolio.

3. Investors who want to bypass advisors altogether can diversify risk and maximize opportunities by investing in exchange traded funds. ETFs allow investors to buy an entire index like the S&P 500 or the Nasdaq 100 for a fraction of the price of a mutual fund. Annual fees are normally below half of one per cent. ETF investors can also pay advisors to create ETF portfolios for a truly diversified mix of securities.     

4. Investors also have the option of going it alone through a discount brokerage, and only pay small flat fees for each trade. Studies show self-managed portfolios underperform professionally-managed portfolios, but there’s no reason you can’t mimic the top holdings in a mutual fund or ETF. Professional managers do it all the time.

Dale Jackson is BNN's Personal Investor. Follow him on Twitter @DaleJacksonPI