Investment fees aren’t really all that complicated, but there are many different variations. That’s why explaining them can be complicated. Before you buy anything from us, we’ll explain in plain language what you can expect.
We’ll walk you through the main types of fees here. It’s best to find out what types of funds you have, so that you can know what YOUR fees are. It’s also possible (although unlikely) that you may own funds with an entirely different fee structure than the main types listed below.
First off, before we go anywhere else, understand that ALL funds have a Management Expense Ratio (MER) which is the percentage that the fund pays out in expenses as a proportion to their assets. Technically these aren’t fees, they are expenses, but whether they are a fee or an expense doesn’t change the fact that they reduce your net return. For example, a fund may have a 2.5% MER meaning that it has paid out 2.5% of its assets to various places, such as investment managers, trustees, brokerage houses, your investment advisor, taxes, etc.
If a fund earns 10% in the year and pays out 2.5%, then it will report a 7.5% return. Had you held $100,000 in that fund for the full year, it would have grown to $107,500.
These days more and more fund companies are offering rebates of the MER to investors on assets above a certain level. At this stage the asset levels required and the criteria for grouping are not consistent, but most companies offer some sort of householding (lumping family members into a group to qualify) and tiering (the larger the amount the larger the rebate).
A word about fine print. Every fund is unique, and you need to read the prospectus to understand the details. For example, it is common these days for funds to have a 30-day or 90-day short term trading fee, so even though in the description of Front End or F-class funds below we note that there is no lock-in period, there may be additional fees in some unusual circumstances.
That said, the most common fee types are…
Deferred Sales Charge (DSC) Funds
Most institutes no longer sell this type, but they started in the ‘80s and became the most common sales option up until 2020, so there are still many of these around. With this type of fund, generally…
- you don’t pay a commission to buy it, but you are (sort of) locked in for a period of time (commonly 7 years).
- you will pay a deferred sales charge if you sell earlier (usually of up to 5%, but declining as you approach the 7-year anniversary of purchase).
- you pay a switch fee (but not the DSC fee) if you switch out of the fund and into another within the same family.
- your advisor is paid a commission by the fund company when you make the purchase and an ongoing servicing (or trailer) commission for each day that they are your advisor on record with that fund.
- the commission is paid by the fund company, not by you, although it’s all ultimately paid by the fund owner (ie. you via the MER).
Front End (FE) Funds
Prior to the advent of DSC funds, these were predominantly sold with a sales charge up to 9%. Today, with FE funds, generally…
- you do pay a commission to buy it (usually 0 to 5% depending on how much money you are investing and/or have invested with the advisor).
- you are NOT locked in.
- you may pay a switch fee (but not the DSC fee) if you switch out of the fund and into another within the same family.
- your advisor is paid a commission by you when you make the purchase (that’s the Front End part).
- your advisor is also paid an ongoing servicing (or trailer) commission for each day that they are your advisor of record with that fund.
- the FE commission is paid by you out of the amount invested. The trailer commission is paid by the fund company, not directly by you. Of course, it’s all ultimately paid by you, the fund owner, via the MER.
Fee Based (F-class) Funds
These are still the least common but are a growing minority. The are used more commonly in higher net worth scenarios. With fee-based funds you don’t pay a commission to buy them or any kind of sales charge to sell them and there is generally no lock-in period. They offer much lower hidden, embedded costs (MERs) and are much more transparent in that the portion paid to the advisor is a separate deduction from the account value. After factoring in both the MER and the advisory fee, they may not always be cheaper than FE funds above, but they are more transparent and often will lead to savings.