Fees: You Might Be Losing More Than You Think

Fees, nobody likes them. Everywhere in life these dreaded additional costs follow us around, from the additional charges on your hydro bill, to environmental fees when you buy a laptop, and of course the banks hitting you with a multitude of fees.

When it comes to your investment portfolio your ultimate goal is to grow your money. However, the costs associated to your choice of investments may very well be eating away at your potential growth and eroding your chances of achieving a positive return. Think of fees as a loss on your investment. Your investments must grow enough during the year to cover this fee just so you can break even for the year. The higher your investment fees, the harder it is to grow your money over the long-term.

In our last article “RIP Mutual Funds, ETF’s are here to stay” we highlighted that one of the main reasons investors chose exchange traded funds (ETFs) over mutual funds was due to their fees being a lot lower. To properly invest your money some fees are unavoidable, however there is no reason you should not strive to reduce these fees as much as possible. One fee that will most heavily impact your return is the management expense ratio (“MER”) as it is charged to your total investment on an annual basis.{C}[SA1] 

The MER is an all-encompassing fee that includes the management fees and operating expenses for a given fund. The MER is calculated and charged daily, however you will never explicitly see the charge in dollars on your statements. The returns published by your fund and the daily values you are looking at are always shown after the deduction of the fees has already been made. It’s a silent killer!

If you are not convinced of the impact that the MER has on your wealth, let us put it in perspective using a comparison of an ETF portfolio and a mutual fund portfolio.

Let’s assume we use a $200,000 balanced mutual fund portfolio with an average MER of 2.15% and a compounded return of 5% per year. The comparable ETF portfolio will have an average MER of 0.50% and a similar return of 5% per year.

The results over 10 years are quite astounding.

Fee Impact over a 10 year period on return

At the end of the 10th year, the mutual fund investor would have a total wealth of $262,138.78 and an effective return of 32.45%. On the other hand, the ETF investor’ portfolio would have totalled $309,851.64 and achieved a total return of 55.30%. The reason for the blatant disparity is that through compounding, the total fees over the decade equalled $51,149.79 for the mutual investor representing an additional $38,262.17 over that of the ETF investor.

Your returns can be heavily impacted over the long-term due to the power of compounding. Every year the money you lose to fees is money on which you could have earned additional returns for all of the future years. Over time this really adds up! In our example, a difference of 1.65% in yearly fees resulted in a 22.85% difference in total return.

Your work hard for your money, so make the most of it. Saving 1.65% in one year might not seem like much, but over the longer term it has a significant impact on your total wealth.