These days, more than ever you need to save as much money as you can for your own retirement. Having an investment account should not mean that you have to sacrifice results for high service fees but unfortunately in many cases that is still a concern today.
Asking you about paying financial commission’s today and the consensus would generally agree it does not work in the client’s best interest. You want to know what you’re going to pay for and the services that will be provided up-front. This fee based financial planning model is based on a percentage of assets under management or (AUM) which can range from .75% to 2.5 % depending on the size of your account and varies from advisor to advisor. One of the main benefits to come out of this route is the counselling fee charged on an annual basis or a flat rate can be largely a tax deductable for you at year end outside of a registered plan.
When you look at your financial statements
Mutual funds sell in different classes of the same fund which allows your account to be purchased in a number of different ways. All funds charge a MER (Management Expense Ratio) If today your investment in fund earns 10% and there is a MER of 2.5% then your actual return is 7.5%. If the MER is 1.5% then your return would increase to 8.5%
Mutual funds are grouped into various classes such as Class A or FEL, B or DSC, Low Load, Series F and Corporate Class to name a few.
You need to be aware of Class B or DSC which stands for Deferred Sales Charge. When your advisor purchases mutual funds with a DSC / B Class, you do not pay the advisor directly but the fund company will pay the advisor a commission, usually in the 5% range. On-top of the commission your advisor will also get a trailer fee, normally in the 0.5%. range. Since you did not pay the advisor directly out of your pocket you still end up paying in more than one way. The mutual fund company who paid the advisor will increase your MER on the fund about 0.5% and more importantly with this type of fund class can have you locked-in for a period of up to seven years!
If you sell prior to this, you will have to pay a penalty to the fund company allowing them to recoup the commission they paid to your advisor. Between the locked-in period and the higher MER this option is simply not in the client’s best interest and represents a healthy percentage of funds on the books today.
The Class “F” Plan
The way to avoid this is to have a fee based advisor that charges you an annual fee for managing your money as a percentage. All you mutual fund investments should be in F class series of funds. These funds remove fees associated with paying commissions and trailer fees to your advisor so the MER is normally about 1% lower again saving you more money to help you reach you long-term plan.
This is just one small tip that will save you some money and you will have the benefit of knowing your financial advisor is on your team by providing you unbiased recommendations that are not commission driven.
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* This publication has been prepared by Kevin McAmmond, Wealth Advisor at ScotiaMcLeod, a division of Scotia Capital Inc.(SCI), a member of CIPF. This publication is intended as a general source of information and should not be considered as tax or pension advice.