Personal Investor: How investment fees eat up your retirement savings
The investment industry is branding the latest fee disclosure rules - known as CRM2 - as a victory for the retail investor. It’s really more of an appeasement for the fact that Canadians pay the highest investment fees in the developed world, and a smokescreen that hides the true cost of investing for retirement.
CRM2 requires advisor fees be expressed in dollar amounts in addition to the normal practice of only expressing them in percentages.
Knowing you pay a one per cent fee on a $500,000 portfolio annually is a lot easier to swallow than being billed $5,000 every year. The industry knows that, and that’s why it dragged its heels on disclosure reforms for over a decade.
CRM2 only applies to the portion of mutual fund fees that are returned to the advisor – the person who sells the fund on behalf of the mutual fund company. A typical mutual fund fee, also known as a management expense ratio, is 2.5 per cent annually. About one per cent is returned to the advisor as compensation – with the remaining 1.5 per cent staying with the fund provider. Only that one per cent advisor fee, though, is required to be expressed in dollars. The bulk of that fee remains hidden as a percentage.
Segregated funds, which often have a much higher fee because the principal is guaranteed, do not require dollar disclosure on either the company or advisor level. They are exempt from CRM2 because they are classified as insurance products.
Why does it matter to investors? Here’s a breakdown of fees in dollars based on a 2.5 per cent MER as a portfolio of mutual funds grows.
2.5% - FEES VS. PERCENTAGES
Having thousands of dollars drained from your portfolio year after year is bad enough. Missing the opportunity to have those thousands of dollars grow and compound over time can be crippling to anyone’s retirement goals.