If you're paying an annual 2 percent management fee and see a 6 percent return on your investment statement, the actual return was 8 percent because 2 percent was deducted to cover the fee. Every dollar you pay in management fees is subtracted from your return—therein lies the difference between gross and net return.
The smallest change in the fee percentage can have an impact on your long-term savings. See for yourself. Experts in the industry generally refer to the MER, which is the percentage of a fund's assets used for administrative and other operating expenses.
It also includes taxes. The MER is very useful, as it allows you to calculate the administrative and operating expenses within a fund you plan to invest in.
As the MER rises, so does its effect on your return. Management fees are not the same for every product, and the percentage they represent varies according to different factors.
For example, fees for a Canadian equity fund are steeper than those for a money market fund, because the equity fund is more complicated to manage and requires in-depth analyses. In other words, the more complex the management strategy, the higher the fees," says Lafontaine. The account manager's style is another factor. Passive portfolio management, which consists in mimicking the investment holdings of a particular index, may be cheaper than active portfolio management.
Finally, fund management companies that use brokerage firms to sell their funds must also pay for the firms' services, which may impact their fees. It's essential to do your research and compare products, as they can have a serious impact on your savings. A dollar paid is a dollar less for your savings goals. In the long term, this can really slow your progress toward your goals," says Lafontaine.
Mutual funds are subject to fixed or variable management and administrative fees. Fixed fees cover costs related to daily fund management, portfolio management, and marketing services, as well as commissions paid to mutual fund representatives, where applicable.
They're calculated as a fixed percentage of the managed assets: 1 to 3 percent on average, and up to 5 percent. So, if you are still trying to sort out which investments are best for you, you can walk into any major bank or financial institution tomorrow and start deferring your taxable income right away.
Guaranteed investment certificates GICs are another very low-risk investment that you can set up within an RRSP at any bank or financial institution. GICs offer a guaranteed rate of investment on predetermined terms. Professionally managed mutual funds are a popular choice offered at major banks and financial institutions for RRSP investments.
Mutual funds are made from a variety of investments that are bundled together in one fund. This makes it easier for your investments to be diversified and, therefore, offer less risk than when compared with investing directly in the stock market.
Professionally managed mutual funds do, however, incur management fees that can be as high as 2. Exchange-traded funds ETFs are relatively new to the investment scene in Canada, but are an excellent choice for people interested in exploring a self-directed RRSP that gives you more control over your investments.
ETFs are collections of stocks and bonds that are designed to track the stock market over time. So, as the market goes up over time, so does your investment. When the market dips, however, you will also lose money. ETFs are a good option for those who can tolerate some risk and are not considering withdrawing money from their RRSPs in the short term.
Robo-advisors that calibrate your investments with a computer algorithm rather than a professional advisor are great options for saving on management fees with ETFs. Self-directed investors who want to buy individual stocks and bonds can certainly hold those investments in an RRSP as well. Stocks, in particular, tend to be more volatile investments and should be geared toward people with a higher tolerance for risk who are comfortable taking a long view of maximizing their investment.
You can either work with a conventional broker or use an online broker to manage your investments on your own. In addition to giving you a tax-deferred place to save towards your retirement goals without, an RRSP is a tool you can tap into to help with two major life expenses: buying your first home; and pursuing further education.
In both cases you can withdraw a portion of your RRSP funds without having to pay tax or penalties, as long as you adhere to a specified repayment plan. Any failure to meet the scheduled repayments in any given year will result in having the unpaid amount taxed at your top rate.
Once it is repaid in full, you are free to use the program again. Canadians can also choose to invest their savings in tax-free savings accounts TFSAs. There are circumstances that would make a TFSA which does not defer tax on contributions and instead offers tax-free growth and withdrawals at any time a smarter choice.
If you think you might need the money before your retirement, a TFSA will allow you to withdraw as much as you want, whenever you want. The flip-side of that equation, however, is that easier access to your money might derail your retirement planning in the long run.
A MER above 1. Here are three strategies to lower the MER on your investments. Mutual funds are actively managed by their fund managers, who may do considerable research on individual stocks and bonds and regularly increase or decrease exposure to certain sectors or securities.
This active management is expensive. Added to this, Canadian investors pay some of the highest mutual fund fees in the world. The trailer fee that is buried in the MER of many mutual funds is an ongoing payment to your financial advisor.
Rear-end load funds usually pay an annual 0. Not only do these trailer fees increase your MER, but they reward your advisor when you continue to hold the same investments, even when this may not be in your best interest. Fortunately, you can often purchase F-class mutual funds, which have no trailer fee. These firms, such as Bellwether Investment Management , offer bespoke, specialized investment services.
Instead of being paid by trailer fees or sales commissions, the investment team and advisors at a private investment management firm are paid directly by their clients. Not only does this compensation approach save you money relative to typical MERs, it offers complete transparency on fee structure and will encourage your financial professional to act in your best interests, since she or he is being paid by you, not the mutual fund manufacturer.
The percentage you pay your investment manager may also be negotiable. In conclusion, the fees you pay for investment products and services will have a significant impact on whether you are successful in achieving your investment goals over the long term.
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