Pop quiz: Do you know how much you pay in fees for your investments and where that money goes? If you have no idea, you’re not alone. Many investors only give their paperwork a cursory glance and feel anxious because they don’t understand what they’re looking at. But, paying closer attention and educating yourself could pay off.
“Understanding what you’re paying and the impact that it has on your overall return is really important,” says Pamela McDonald, director of communications and education at the British Columbia Securities Commission (BCSC). “It makes a difference to your future.”
For example, paying 2.5 per cent rather than 1.5 per cent in fees on a $50,000 investment could reduce your return by more than $17,500 over 20 years, assuming a five-per-cent return. That’s a large sum of money that could be put toward a comfortable retirement, your child’s education or a dream vacation.
Yet a recent poll by the BCSC found that 36 per cent of investors feel overwhelmed by investment decisions, and of those anxious individuals, 39 per cent avoid reading their statements because it causes them anxiety. A quarter of anxious investors said having a better understanding of basic principles would help ease their stress. Understanding your fees is a great place to start, McDonald says.
All investments come at a cost and everyone pays fees. That’s how advisers get paid for buying and selling investments on our behalf and for the advice they give us. There are two broad categories of fees: those you pay directly to your firm and those that your firm receives from other companies for the investments you hold.
Every year, your investment firm must provide you with a charges and compensation report, which details how much the firm earned for the investments you hold. This requirement is part of securities regulatory changes that came into effect in 2016. The report itemizes all fees paid and calculates a total figure for the year.
Most investors will be getting their charges and compensation report this month, so look out for it in your mail or via your online account. Whether you experience sticker shock or think everything looks just right, schedule a meeting to discuss your fees with your adviser. “You have choices in the investments you make,” McDonald says. “Lower fee options might exist among very similar products, and some fees might be negotiable.”
Before meeting with your adviser, McDonald suggests doing some research and preparing questions. The BCSC’s InvestRight.org site is a great place to start.
“Ask your adviser about anything you don’t understand and keep asking the questions until you feel knowledgeable,” she says. “By understanding your fees, you’ll be more empowered when it comes to your relationship with your investments and with your investment adviser.”
How much impact can a 1% difference in investment fees make? Use our calculator here.