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Mutual Fund Full Disclosure

This is a Sunday feature looking back at selected articles from the early days of this blog before readership had ramped up. Enjoy.

Many investors seem unaware of the fees they pay to own their mutual funds. Disclosure rules are intended to prevent this sort of problem, but they don’t seem to be effective enough.

Suppose that you meet with a financial advisor and agree to invest with her. She seems like a great person, and her investment advice seems sensible as far as you can tell. Then she hands you the following disclosure statement:

Initial portfolio size: $150,000
Initial investments: 30% bond fund, 50% stock fund, 20% international stock fund
Estimated Fees:
Immediately: $6300
Year 1: $3135
Year 2: $3324
Year 3: $3526
Year 4: $2718
Year 5: $2781
Year 6: $2838
Year 7: $4815
Year 8: $5164
Year 9: $5540
Year 10: $5944
10-year total: $46,086

Gulp. Surely these can’t be right. Will you really pay this much? Yes, you will. These numbers were calculated based on the fees charged by three popular mutual funds offered in Canada. The bond fund has no load, the stock fund has a deferred sales charge, and the international stock fund has a front-end load. The dollar amounts assume a 4% per year return in the bond fund and an 8% per year return in the stock funds.

This type of disclosure would be a real eye-opener for investors and would make it harder for financial advisors to hide fees. It might also encourage more competition on fees among mutual funds.

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Comments

  1. Retirement Investing TodayDecember 6, 2009 at 5:54 PM

    This is just one of the reasons I became disillusioned with the Financial Sector back in 2007 and chose to go it alone.
    http://retirementinvestingtoday.blogspot.com/

    ReplyDelete
  2. Financial CentsDecember 28, 2009 at 9:31 PM

    Very revealing Michael. Well done!

    However, what if those fees you were paying were besting the index?
    Say over 10+ years?

    Most Mutual funds posts returns (in comparison to their index) after MER fees.

    Thoughts?
    Cheers!

    ReplyDelete
  3. Michael JamesDecember 28, 2009 at 11:12 PM

    Financial Cents: Very few funds best the index after fees over 10 years, and it's near impossible to figure out which ones will do it. Picking a fund that did it over the past 10 years gives no guarantee that it will do it over the next 10 years.

    It's true that mutual funds report returns after fees. However, it's also true that the average fund's performance is the index less fees, and so, on average, the investor's is paying the fees.

    ReplyDelete
  4. Financial CentsDecember 30, 2009 at 12:43 PM

    Fair enough Michael, and I understand your points, and I don't disagree in many ways...

    Maybe I've been lucky, since I selected TD Bond many years ago with a TD Equity as well. After MERs, both funds have returned over 5% and 7% respectively, above e-funds and index benchmarks since I've held them.

    Not that past performance will dictate future performance, but nonetheless not poor results.

    Happy New Year and keep your insightful posts coming!

    ReplyDelete

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