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Area graph with fees speech bubble to the right

B Charges and fees

The fees that you pay to your firm for the advice and services it provides you also have an impact on the overall performance of your account.

When you pay a fee, you’re paying for the various services that your firm provides, which can be different depending on your firm or the type of account that you have. This includes things like providing advice or a review of your financial goals, determining your risk profile, assisting you with building your financial plan, trading securities on your behalf and providing you with statements about your account.

Not only do you reduce your account’s performance by paying fees, you also miss out on the compounding power that the extra money would have made.

However, fees can add up considerably over time, and even a fraction of a percentage can have a significant impact on the long-term value of your account. Not only do you reduce your account’s performance by paying fees, you also miss out on the compounding power that the extra money would have made.

How do fees affect your account?

Let’s say you invested $5,000 a year into an account that earned 5 per cent each year. Each year, you paid your firm a fee for the services it provided to you, such as maintaining the account and providing you with advice.

If the fees you paid totaled 2.5 per cent each year, after 25 years your account balance would be $175,059.

In the same example, if the fees you paid totaled 1.5 per cent each year, your account balance would be $201,556. Even a small difference in the fees that you pay for your account can have a significant impact on your account’s performance over time.

$5,000

Balance

Total value after 25 years:

$250,567

with 5% annual growth

Fees paid:

% of total value lost to fees:

$250,567

No Fees
1.5% Fees
2.5% Fees

The new report on charges and fees breaks down the fees that you’ve paid over the past year to maintain your account and make trades. It also shows incentives that are paid to your firm by others, such as trailing commissions or referral fees. This report will be sent along with your account performance report so that you can consider the value of the advice and services that your firm has provided.

With this new report, your firm is required to itemize the cost of everything from embedded trailer-fees to redemption fees, commissions, switching fees and RRSP administration fees, as well as provide you with a dollar figure of the total amount that you paid in fees over the past year.

Types of fees and charges

No matter what type of investment you buy or advice you receive, you will be charged fees. There are many different types of fees and ways that you can be charged.

Operating Charges

Operating charges include fees such as administration fees, safekeeping fees, management fees, transfer fees, account closing fees and any other fees associated with maintaining and using your account that you pay to your firm.

Some firms offer fee-based accounts, where its charges are combined into a single amount, typically based on the size of your account (for example, 1 per cent of your total account value). Firms are not required to break down all of the smaller charges that are rolled into a single amount for fee-based accounts.

Transaction charges

Transactions charges include fees such as trading commissions, switch or change fees, performance fees, short-term trading fees and sales charges or redemption fees that you pay to your firm.

Payments from third-parties

Third-party fees can include referral fees, success fees (fees paid on the completion of a transaction) or finder's fees that your firm receives for having you as a client or investing your money into a certain fund.

Trailing commissions

Trailing commissions (or trailer fees) are paid each year to your firm by the fund that you invested in, as long as the fund structure provides for such payments. The fund sets the rate of the commission, which is paid to your firm for as long as you hold the fund. Not every fund pays trailing commissions, but most funds that are sold outside of fee-based accounts or discount brokerage accounts do.

Keep in mind that the report on charges and fees is not a breakdown of your advisor’s personal compensation, but rather the compensation that has been paid to the firm.

The report on fees is also not a report on the cost of the investment products that you own, but rather the cost of the advice provided to you by your firm. Fees that are charged within an investment fund, such as management fees, are not included as operating charges in your report.

If the manufacturer of a mutual fund (or similar product) that you’re holding in your account is taking a fee directly out of the fund’s earnings, you’ll find that listed in the Fund Facts (or other disclosure documents) that the manufacturer provides, under the product’s “management expense ratio.”

What is a management expense ratio?

A management expense ratio, or MER, is a combination of a mutual fund's management fee and its operating expenses. They are paid by the fund and are expressed as an annual percentage of the total value of the fund. This means the effect of the MER is already factored into the market value reported in your account statements.

The management fee paid to the fund management company includes the cost to oversee the fund, hire a portfolio manager and other companies to assist in the fund’s administration. Operating expenses can include bookkeeping and administrative fees, marketing costs, filing and legal expenses, as well as taxes.

MERs can range from less than 1 per cent to more than 3 per cent. While investors don’t pay these expenses directly, they are affected by MERs because these expenses reduce the fund’s returns.

To find out more about the fees that are applied to the actual investments that you own, you should speak to your firm or check the product’s disclosure documents, such as Fund Facts for mutual funds. Reading the product disclosure alongside the new report on charges and fees should give you a comprehensive look at the total cost of your investments.

Making decisions about your money

When taken together, these new annual reports can help you make sense of the fees that you’re paying to the firm investing your money and the performance that you’ve received over time.

These are important factors when it comes to making decisions about your money. Knowing how you’re progressing toward your financial goals, and when it may be time to adjust your plan in order to meet them, is part of being an informed investor.

Knowing how you’re progressing toward your financial goals, and when it’s time to adjust your plan in order to meet them, is part of being an informed investor.

While these new reports are designed to increase the transparency around your account’s overall performance, there are many other factors that you should consider and be aware of when it comes to making decisions about your money. It’s important to ask questions and know where to look for help with understanding your investments.

Take the time to review these new reports and understand what they’re telling you about your money.

Take action

When you receive your next annual statement, make sure that you take the time to review these new reports and understand what they’re telling you about your money.
Talk to your firm if you have questions or concerns about your account’s performance over the past year, or if you want to know more about how the fees you’re paying relate to the advice and services that your firm has provided.
Visit GetSmarterAboutMoney.ca to learn more about investing, including information on working with an advisor, monitoring the performance of the products that you’ve invested in, and diversifying your portfolio.

This message is brought to you by the Investor Office of the Ontario Securities Commission. The Investor Office sets the strategic direction and leads the Ontario Securities Commission’s efforts in investor engagement, education, outreach and research. The Office also brings the investor perspective to policy-making and operations. Learn more at InvestorOffice.ca.