It seems like every time I turn on the TV, there’s a commercial pushing the narrative that mutual fund fees are too high and the fund companies are coming out ahead to the detriment of their investors. Ads by their nature offer one specific point of view and I’m not so sure these ads paint a full picture, especially when you consider people have been successfully building their retirement savings in mutual funds for decades and fees have been declining.

According to a recent study of U.S. funds by Morningstar as reported in Pensions & Benefits, mutual fund and ETF investors paid lower fees in 2017 than ever before, saving $4B in fund expenses. Canadian mutual fund fees are following the same downward trend. They’ve had to in order to stay competitive.

But Are Mutual Fund Fees Still Too High?

My question is, too high in relation to what? The only way to answer that question is to look at what mutual funds provide: diversification and professional management. These are hard and expensive to get outside a mutual fund. If you’ve just entered the workforce and are able to invest $200 a month, where are you going to put that money to get the most value? The current share price of CIBC is about $115. That $200 investment won’t get you very far.

Depending on the product, a mutual fund will give you exposure to many companies in a range of sectors or in a specific sector or in a specific geographic region. It’s up to you and where you want to invest. A mutual fund also offers a professional manager whose job is to be an expert on the companies held in the fund he or she is managing.

Fees will vary with the level of activity in the fund. More actively traded funds such as growth, technology and foreign funds tend to have higher fees than passively traded funds, such as balanced funds.

Another key consideration when deciding on whether mutual fund fees are too high is performance. Is the fund meeting your investment objective and at what cost? For example, if you are a moderate risk investor paying  2% to 2.5% in management fees and making 8% after those fees are paid, I think that’s a pretty good tradeoff and I think most investors would agree. Ultimately, the bottom line is what investors should focus on. What are you earning after fees? Is the fee justified? If the fee is more than the return, then you should sell that fund.

These are the same questions you should be asking of any professional service you engage. If you hire a lawyer who helps you win a $100,000 settlement in court, you’re not going to get the full $100,000. He or she is going to take their fee.

The Key Is To Find A Mutual Fund That Meets Your Needs.

This is where you should be speaking to your advisor about your objectives, what different funds offer and which funds align best with the type of investor you are, your risk tolerance, time horizon and what you’re trying to achieve. It’s no different than creating a stock portfolio. I build portfolios based on the client sitting across the table. My job is to choose the right products that will help you attain your financial goals.

As I see it, flexibility not fees is the biggest issue with mutual funds today. There are still investment companies that offer non-transferrable products, which means if you want to change advisors, you have to sell those products even if that doesn’t make financial sense for you. This is a topic that I don’t think gets enough attention. When it comes to mutual fund fees, concentrate on the following:

  • Understand what you’re paying for.
  • Performance. Is the mutual fund delivering the returns you’re after?
  • Is the expense worth the return on investment?
  • Does the fund align with your risk profile and goals?

Call Me or Email Me

My approach to investing is straightforward. I help my clients find good quality investments, follow trends and adjust as needed. With all the volatility we’ve had, it’s a good time to review your investments and make sure you’re on track to achieve your goals. I welcome you to call me at 416-332-3863 or email me at allan@allansmall.com.