Mutual Fund and ETF Fees
There are costs to owning any type of any financial product, be it insurance, a deposit account, securities or an investment fund. Of all of these products, mutual funds and ETFs are the most transparent and regulated when it comes to cost. Most important, the costs are fully disclosed and reported as a total amount, usually including the cost of advice, and net of returns, so the investor knows what the real return is and how much s/he is paying. Investors in other countries, such as the U.S., may have to tally up management costs, trading costs and advisor and other hidden costs and then try to calculate their returns.
The way in which dealers and advisors are paid has evolved over the past two decades, moving from one where investors paid a significant up-front fee – often nine per cent – to one that encouraged long-term holdings with penalties for early withdrawal. Many mutual funds have eliminated the front-end and back-end fees, preferring to pay dealer and advisor costs from the trailer. There is a misconception that 100 per cent of trailer fees are paid to the advisor. Trailers fees actually are paid by the fund company to the dealer to help cover costs, including the costs of complying with Canada’s rigourous regulatory requirements, with only a portion going to the advisor. Advisors who are primarily paid through trailers are, in effect, being compensated on an installment basis.
These competitively priced, built-in fees are another reflection of the pooling principle behind mutual funds, and make advice affordable and readily available to all investors, regardless of account size.