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 This account feature protects you and your credit rating if more money is withdrawn than there are funds to cover it.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. • Email: mleong@nationalpost.com | Twitter: lisleong