We are willing to browse for longer to find better deals online. We wait for sales or negotiate to get discounts on purchases. Then why not with investing?
Investors can’t control market up and downs, however, they can choose economically managed funds, or skip commissions to maximize their return. The cost of a mutual fund significantly affects a long-term return of the fund due to compounding.
Check how your financial advisor gets paid (commission-based, or fee-based) to make more informed decisions. Try calculators to check what the best option for you will be: Mutual fund fee calculator
This is represented by the Management Expense Ratio (MER), which usually ranges from 0.2% - 3% per year. Specialty or international funds that require more expertise charge higher MER.
MER can consists of the following elements:
- Cost of hiring the fund manager (0.5 - 1% per year). *Note: a high fee does not guarantee superior performance.
- Administrative costs: postage, record keeping, customer service, and office equipment.
- 12B-1 fee: brokerage commissions, advertising and promoting the fund.
Trailer fees (0.25 - 1% per year): Financial advisors are paid so that they recommend to their clients a particular mutual fund. When a client remains invested in a particular mutual fund, the fund pays the financial advisor a percentage fee based on the client's allocation to the fund.
Transaction fees/sales charge: Loads are fees that compensate brokers for selling the mutual funds. A financial advisor often receives a small share of loads, or a single client advisory fee (1-2%) every year. One of the ways to save this cost is buying the funds through an online brokerage.
- Front-end loads: pay fee when purchases are made. Be cautious with it especially when you make regular contributions.
- Back-end loads: pay fee when selling within a time frame. After a certain time frame, you don’t need to pay a back-end load.