This information was taken from.
http://www.stonecreekwealthadvisors.com/investing-secrets/disclosed-undisclosed-fees/
When it comes to investing there are both disclosed fees and undisclosed fees. Disclosed fees are those that are required by law to be reported. Undisclosed fees are those that are not. To understand what these undisclosed fees are you must understand what active management is.
Active management is the attempt of either an individual or a money manager to try and out-perform the stock market by actively trading individual stocks and/or engaging in market timing – predicting when to be invested (in the market) or not be invested (out of the market.)
For example, a large-cap mutual fund would try to outperform the S&P 500 index. Because they are attempting to beat the index, they are going to incur some additional fees in their attempt.
Active management creates an undisclosed fee to investors called transaction costs and bid/ask spreads. On average this active trading costs investors an additional 1.44% per year. This is in addition to the management expense ratio (MER). The MER typically includes management fees, 12b-1 fees (commission fee), and other expenses deducted from assets or charged to all investors accounts. The average MER for mutual funds is 1.45% per year, which together with an average trading cost of 1.44%, renders a total average annual fund cost of 2.89% per year for the average active mutual fund. Also keep in mind that aggressive portfolios (i.e 90-100% stocks) would have a higher MER then more conservative or balanced portfolios (I.e 60% stocks, 40% bonds).
Ken French of Dartmouth’s Tuck School of Business estimates that investors collectively spent $102 billion per year in trying to achieve above-market rates of return. Unfortunately, this active trading does not produce better returns. More than 90% of mutual funds underperform the market after fees.
So if this is true, then why have a financial advisor at all?
To answer your question, a financial advisor can be very helpful. They can save you time, teach you laws and risks that you never knew about, and they make investing a lot easier for you. Most importantly, they can save you a lot of money. For example, a financial advisor can show you how to invest in index funds like the S&P500 at 0% management fee (but you still have to pay elsewhere). They can also show you how to avoid capital gains taxes and income taxes on your investments (for a fee). This is huge because taxes are the single biggest expense that you will pay in your lifetime. It's also possible that investments with a higher rate of return may grow slower then one with a lower return, if one has it's growth slowed down by taxes and the other, grows tax-free. There are also ways to customize your investments such as paying a higher fee to gain access to participating bonuses. Ideally, your financial advisor will compare the past performance of all of your options (such as low fees vs participating bonus) since inception and show you which option had the highest return in the past so that you can make the best decision.
To schedule your free consultation, please give a call at 647-526-8553 or an email at jtran@greatwayfinancial.ca
http://www.stonecreekwealthadvisors.com/investing-secrets/disclosed-undisclosed-fees/
When it comes to investing there are both disclosed fees and undisclosed fees. Disclosed fees are those that are required by law to be reported. Undisclosed fees are those that are not. To understand what these undisclosed fees are you must understand what active management is.
Active management is the attempt of either an individual or a money manager to try and out-perform the stock market by actively trading individual stocks and/or engaging in market timing – predicting when to be invested (in the market) or not be invested (out of the market.)
For example, a large-cap mutual fund would try to outperform the S&P 500 index. Because they are attempting to beat the index, they are going to incur some additional fees in their attempt.
Active management creates an undisclosed fee to investors called transaction costs and bid/ask spreads. On average this active trading costs investors an additional 1.44% per year. This is in addition to the management expense ratio (MER). The MER typically includes management fees, 12b-1 fees (commission fee), and other expenses deducted from assets or charged to all investors accounts. The average MER for mutual funds is 1.45% per year, which together with an average trading cost of 1.44%, renders a total average annual fund cost of 2.89% per year for the average active mutual fund. Also keep in mind that aggressive portfolios (i.e 90-100% stocks) would have a higher MER then more conservative or balanced portfolios (I.e 60% stocks, 40% bonds).
Ken French of Dartmouth’s Tuck School of Business estimates that investors collectively spent $102 billion per year in trying to achieve above-market rates of return. Unfortunately, this active trading does not produce better returns. More than 90% of mutual funds underperform the market after fees.
So if this is true, then why have a financial advisor at all?
To answer your question, a financial advisor can be very helpful. They can save you time, teach you laws and risks that you never knew about, and they make investing a lot easier for you. Most importantly, they can save you a lot of money. For example, a financial advisor can show you how to invest in index funds like the S&P500 at 0% management fee (but you still have to pay elsewhere). They can also show you how to avoid capital gains taxes and income taxes on your investments (for a fee). This is huge because taxes are the single biggest expense that you will pay in your lifetime. It's also possible that investments with a higher rate of return may grow slower then one with a lower return, if one has it's growth slowed down by taxes and the other, grows tax-free. There are also ways to customize your investments such as paying a higher fee to gain access to participating bonuses. Ideally, your financial advisor will compare the past performance of all of your options (such as low fees vs participating bonus) since inception and show you which option had the highest return in the past so that you can make the best decision.
To schedule your free consultation, please give a call at 647-526-8553 or an email at jtran@greatwayfinancial.ca
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