Fees & Charges
Be sure to ask your registered investment advisor about all the fees and other charges you will be paying. Some may be negotiable, so it is important to read the information your advisor provides you and ask questions if you are not clear on what you are paying for investments and/or advisory services.
New securities laws in effect since July 2016 require investment advisory firms to provide all clients with a detailed annual report about the operating, transaction, and related fees and other charges. Your investment advisor can tell you when you will receive your first annual Charges & Compensation Report.
Listed below are some common fees and charges you should be looking for and asking about. For more on investment fees and other related topics, see our Investor Toolkit.
Portfolio managers and many advisors charge a fee based on a percentage of the portfolio’s value. This fee is negotiated at the beginning of your client/advisor relationship, and pays for the cost of managing your overall portfolio.
These are amounts charged per transaction based on buying and selling stocks and bonds. The risk with a commission-based account is that an unscrupulous advisor could trade more than is warranted to increase their income.
Discount Broker Fees & Charges
Discount brokers vary in the services they offer and the amounts they charge. Generally, they charge a basic amount per trade, but may also charge additional amounts related to the number of trades and the size and the scope of the account.
Fee for Service
For fee-only services, the advisor charges a set (often hourly) rate and does not collect commissions. Fee-only advisors can avoid conflicts of interest and provide unbiased advice because they do not earn fees from the products they recommend.
Management Expense Ratio (MER)
Each fund pays its own operating expenses, including legal, accounting, and management expenses. The MER is the total of all expenses expressed as a percentage of the fund’s value. For example, if a $100 million fund has $2 million in annual expenses, its MER is 2%. The higher the MER, the more you pay indirectly for management and administration. MERs may be high because the fund manager actively researches, trades, and manages the fund, and there are high operating costs, such as legal fees.
If you own shares or units of a mutual fund, the fund manager may pay an annual commission to your investment advisor’s firm. Trailing commissions may bias the advice you receive from the advisor.
Sales Charges or Front-End Load Charges
Paying a charge when you buy the fund is called an initial sales charge or front-end load charge. If you come across a fund without sales charges, be sure to compare other expenses, such as the MER.
Deferred Sales Charges or Back-End Load Charges
Some mutual funds only charge you when you sell, not when you buy. Charges paid at the time of redemption vary depending on how long you have held the fund. Fund companies do not charge this if you hold the fund for the required number of years.
Short-Term Trading Fees
If you sell a fund within a certain period, normally around 90 days, the fund will likely charge you. The purpose of this charge is to discourage investors from using mutual funds to make a quick profit by timing the market, and in the process decreasing the value of the fund.
Exchange-Traded Funds (ETFs)
Management Expense Ratio (MER)
Each fund pays its own operating expenses, including legal, accounting, and management expenses. The MER is the total of all expenses expressed as a percentage of the fund’s value. For example, if a $100 million fund has $1 million in annual expenses, its MER is 1%. The higher the MER, the more you pay indirectly for management and administration. While most ETFs have lower MERs than mutual funds, some ETFs are actively managed. This may lead to a higher MER on a particular fund.