FP Summer School: Know what fees you’re paying and how to minimize them

August 2, 2014 Financial Post

August 2, 2014

By Melissa Leong

Summer school isn’t a punishment. Think of it as a second chance or bonus education. But instead of improving your GPA, we will help you improve your credit score. That might mean repairing your finances with better saving, earning more money, paying less taxes or getting smart with your investments.

This weekFee facts 101

Course description: Few things in life are free. Sure, there are free samples of protein bars at grocery stores and free hand-me-downs from grandma, but it costs you time to wait in line for the snack and effort to drop unwanted items off at donation centres.

So it should come as no surprise that it costs you money to manage your money — whether it’s banking fees, ATM fees or mutual fund fees. Or maybe it is a surprise to you.

Many mutual fund investors don’t know what they are paying or even that they are paying anything at all. According to a 2013 study by Environics of Canadians over 25-years-old and with more than $25,000 in investable assets, 25% said that they did not pay their advisor either directly or indirectly.

It’s important to understand what you’re paying and what you’re getting in return — then you can decide whether it is worth it and whether you should take steps to minimize fees.

Avoid banking fees altogether. This is easy to do when you’re a child or a student. Otherwise, financial institutions such as President’s Choice Financial or Tangerine or some credit unions offer you free bank accounts.

Meanwhile, other banks will waive your monthly fee if you keep a minimum balance, usually $1,000. TD for example will waive its $29.95 monthly fee for its all-inclusive banking plan (annual savings of $359.40), but you have to keep at least $5,000 in the account at all times. Just make sure that minimum balance wouldn’t be better used elsewhere.

Make sure your account is right for you. Do you need unlimited debit transactions? Call your bank and ask them to review your activity to help find the right plan for you. “Find one that works for your lifestyle,” says Robb Engen, a fee-only financial planner who blogs at BoomerandEcho.com. Do you write a lot of cheques? PC Financial offers its clients free cheques.

Go paperless. TD, BMO, Scotiabank and CIBC charge customers up to $2 per month to receive statements by mail. “If you get a new product, you’re automatically into paper [statements]. Just go online and make sure you go in your account settings and pick off that you want e-statements only,” Mr. Engen says.

Be aware of electronic transfer fees. The banks will get you for $1 to $1.50 for an Interac e-transfer or e-mail money transfer, he says. If you email a lot of money, let’s be friends, just kidding; if you email a lot of money, you might consider a Tangerine chequing account which offers free email money transfers (it can take two to three business days for the money to arrive in non-Tangerine accounts).

ATM machines in convenience stores or bars or malls will ding you the most, charging you up to $3 at the machine (not including what your own bank charges you). “At lunch time, the university students are lined up to take money out of this thing. It’s charging them $3 and I cringe every time I see it,” Mr. Engen says. If you use an ATM, take out more than just $20 and stick to your own bank’s machines.

Consider whether you need overdraft protection. This account feature protects you and your credit rating if more money is withdrawn than there are funds to cover it. RBC charges most clients $4 a month or overdraft interest, whichever is higher, and an additional $5 every time it occurs.

If this happens often, overdraft keeps you from being hit with the dreaded non-sufficient funds (NSF) fee of $45. If this happens often, perhaps, you need to be looking at your cash flow and your budgeting. “It’s a terrible habit to get into,” Mr. Engen says. “Once you activate [overdraft protection], I’ve been there, I lived in overdraft.” Tangerine offers a 30-day Whoops Protection free with its chequing accounts, meaning they’ll cover you up to $250 without charge for 30 days.

Watch out for random extra fees such as dormant fees (if your BMO account is inactive for two years and you do not reply to a notice, you’ll be charged $20).

Yes, your mutual funds have fees. Mutual fund fees include those paid when you buy or sell shares in a fund — they’re called sales loads – which could be a couple percent to 10%. There are front-end loads: if you invest $100,000 with a 2% front-end load, a one-time fee of $2,000 goes to the investment firm/advisor. With back-end loads or deferred sales charges, you pay a fee if you sell a fund within a certain time frame. (A typical DSC starts at about 6% of your investment in one year, declining to 0% by year seven.)

If you want to avoid the fees, you have to hold onto the fund for the five to seven years, opt for “no load” funds or move the money to another fund offered by the mutual fund company. Some fund companies let you take some of your money (usually 10%) out of the fund every year without paying a fee.

The other thing to note is the management expense ratio. These so-called invisible fees are collected before returns are reported. If the annual management fee is 2.5%, for example, and the total return is 12.5%, you’d see a return of 10%.

You can’t really avoid these. You’re paying for financial advice and active management. If you want to get away from higher MERs, you could always take a do-it-yourself approach with your portfolio or opt for passive investing or indexing. Exchange-traded funds and index mutual funds have lower MERs; TD’s e-series funds, for example, have MERs as low as 0.33% versus 2% or 3% that are typical of regular mutual funds.

Some investment fees are tax-deductible. If you have a professional portfolio manager handling your non-registered investment assets, the fees you pay are tax deductible. If you invest in mutual funds, you can’t do this unless you use F class or fee-based funds that do not embed advisor fees in the MER.

DIY is getting cheaper. Canadians have benefited from competition as several bank-owned brokerages brought in $9.95 trades for all clients (as compared to typically $29 per trade). Credential Direct recently announced a flat trade commission of $8.88. Questrade and Virtual Brokers offer a penny per share commission structure and free ETF purchases. “There is a lot of focus in the industry on the commission price. That’s at an all-time low in Canada,” Kim Thompson, senior vice-president of advisory services at Credential Financial, says. “But every consumer should take the opportunity to fully understand all the fees that are associated with his investments and ask questions.”

Be aware of other fees such as Electronic Communication Network (ECN) fees, exchange fees, transfer fees if moving between brokers ($125 at Questrade) and inactive account fees ($19.95 per quarter if account is under $5,000). Some ECN fees are as low as $0.0008 per share and are either absorbed by the online brokerage or born by the investor.

Homework: Do you hold mutual funds with a deferred sales charge or back-end load? I know the latter sounds like your investment is hauling a shipping container. But maybe your mutual fund has some weight that you were unaware of. Ask your advisor if you hold them and if you do, discuss why and how much would it cost you if you sold the funds today. If you had plans to sell and use the money in a year or two, then a DSC mutual fund wasn’t the best idea.

 

Read full article at: http://business.financialpost.com/2014/08/02/fp-summer-school-know-what-fees-youre-paying-and-how-to-minimize-them/