Do Investment Fees Matter?
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I read an interesting article over at Moneysense.ca about the impacts of fees on an investment portfolio. The premise is to question whether a “measly” 1% in mutual fund fees (i.e. the difference between 2% MER and 3% MER) has much of an impact on your returns. The answer is a resounding yes, and I like how the author addresses:
Paying a single percentage point more in fees doesn’t mean you get to keep 98% of your money instead of 99%. It actually means tens of thousands of dollars in lost savings to most portfolios.
He goes on to highlight the various ways a portfolio gets eaten away at by things such as taxes, and most importantly high fees. He goes on to present this bit of research which for me drives it home:
…when Gene Hochachka, a former quantitative analyst for Vancouver mutual fund company Phillips, Hager & North, looked at how fees affected the performance of Canadian funds between 1986 and 2003, he found that for every extra percentage point that was charged in fees, performance went down by a percentage point.
Think about that – mutual fund fees have a direct impact on fund performance – to the tune of reducing your returns by 1% for every extra 1% you pay in fees. Boycot high fee funds – thay are not worth the marketing!!
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Gary Williams said:
My desire to minimize fees is one of the reasons I use the US-based BuyAndHold as my brokerage: their basic membership is $7 per month, with the first two transactions in the month included in that fee, and subsequent transactions are $3 each (or you can get the $15-per-month plan with unlimited transactions). Also, they use fractional shares and will optionally reinvest your dividends for free.
My overall fee overhead through them is about 0.35%.
Caveats: I think B&H requires all clients to be US citizens with US addresses (although I live in Canada), they don’t allow PO boxes (but there is a way around that thanks to a bug in their address validation code), your email address must have a .com, .net, .org, or .us TLD, and “only” about 4,305 securities are available for purchase.
March 15th, 2007 at 11:05 pm
[...] In this blog, I have spoken a number of time about the impacts of fees on an investment portfolio. The trouble is, there is very limited awareness of the investing public of the huge fees that are being charged for investment services. Take Canada’s mutual fund industry, which has one of the highest fee structures in the world. Recent profits on one of the Canadian fund companies speaks to this. [...]