The Impact of Fees on Investment Performance

The Impact of Fees on Investment Performance

Fees matter. In a good market investors have a tendency to ignore them and in challenging markets they are scrutinized, but in the end no matter what type of market we are in fees do matter .  The fees paid on the mutual funds directly impact how much the portfolio is worth at the end of the day. It seems that a rational investor should look for the best investment management they can get at a reasonable cost.  So why is the mutual fund industry in Canada still charging (and why are investors still paying) amongst the highest investment management fees in the world?  It comes back to the fact that the majority of mutual funds are still sold to investors by salespeople rather than bought by people who understand the costs and complexity of the holdings.

How do fees really impact your return?  The basic premise is straightforward – the  more fees paid for someone to manage the fund, the smaller the amount left for the investor. Given we are in a challenging environment of low interest rates and equity volatility, why wouldn’t an investor want to do the one thing they can to improve their potential returns which is reduce what they pay.  Some do…most don’t.  What can investors do?

The first step in assessing the value the current manager provides is to figure out what the actual fees are.  If investing in a mutual fund, these costs are found from the fund company’s now required “Fund Facts”. This document clearly outlines all the fees paid– including up-front fees (or loads), deferred sales charges or switch fees.  Fund management expense ratios are also available on sites such as and  A brief description of the common fees charged follows.

Fee type What is it?
Front end load Fee charged to purchase funds.  It reduces the amount you have available to invest – if you started with $10,000 to invest and the company charges a 2% front end load, you end up actually investing $9,800.  So you start off $200 in the hole.
Deferred Sales Charge (DSC) or back end load Charge imposed if you sell fund units within a pre-specified period of time.  Starts as a higher percentage in the first year (i.e. as high as 7%) and declines over a period of time. Limits investors’ flexibility to sell out of a fund family in the first few years of owning the fund.
MER Costs charged to the mutual fund including the management fee paid to the manager for investment services.  It includes legal, custodial, auditing and marketing. This is where fees get high as many large fund companies pay commissions to salespeople to incent them to sell their funds and also spend a lot on advertising.
Trailer fee Commission paid to broker by fund company to sell fund company’s product.  This is not a fee charged to the client directly, but is built into the MER.
Transfer out fee Administrative fee charged by transferring institution after client choses to transfer out.
Performance fee Fee charged by manager if fund performance is above a certain pre-determined level. Incents the  manager to achieve strong performance but may also encourage manager to take on risk to obtain results.
Annual Administration fee Annual fee for administering the account – usually under $150 per year.

Not all fund companies charge all of the fees outlined above, but it is important to know what is being charged to determine if the value received from the current manager is appropriate.

Why does it matter?  A 1% difference in fees doesn’t seem like a lot, particular in a strong equity market.  It can make a huge impact, however, particularly over a longer time period.  For example, a $100,000 portfolio that earns 8% before fees, grows to $320,714 after 20 years if the client pays a 2% MER each year (note the average MER of a Canadian Equity Fund in Canada is 2.34%*). In comparison, if the investor opted for a fund that charges a 1% MER, after 20 years, the portfolio grows to be $386,968 - a difference of over $66,000!

In an environment where we expect to see very low bond returns and modest long-term equity returns, reducing the fees paid year after year by what appears to be a small amount can have a large impact on your portfolio.

* source:

This article is not intended to provide advice, recommendations or offers to buy or sell any product or service. The information provided is compiled from our own research that we believe to be reasonable and accurate at the time of writing, but is subject to change without notice