Is The Benefit Mutual?
(July 2004)
By Elaine Kelly, MBA, CFP, FMA
Wondering what your investment specialist gets when you make an investment?
Worried that the decisions made might be in your representative's best interests…instead of yours?
Suspicious of sales incentives?
Financial management fees have been under close scrutiny lately and have many of us asking questions, such as…
Can I save fees and get the same return by simply buying an index?
Since the late 1990s, investors have been able to buy Exchange Traded Funds (ETF), which attempt to mirror index returns, require little analysis and have lower fees. However, they need to be held in a stock brokerage account, which not all investors can manage. You can also use an index-linked GIC, which has no MER (Management Expense Ratio), to capture a portion of the index's returns. Mutual Fund companies, on the other hand, may point to their track record and superior investment management teams to show that active portfolio managers can find stocks with hidden value or upside potential that allows investors better returns or less volatility.
What about No Load mutual funds?
No Load means no commission payable at time of purchase or redemption. Even No Load funds have an annual MER. The MER pays for portfolio management, account administration, and phone or internet service. Because no personal service or knowledge of the investor's goals is involved, you might not benefit from a fund with great returns unless a representative helps with asset allocation and re-balancing. You've got to know when to hold 'em and when to fold 'em.
Just how valuable is an investment specialist?
Studies have shown that investors using representatives generally outperform investors who don't - the performance of an investor may be worse than that of the fund in which he/she invests if buys are made when prices are high and selling happens in a panic, when prices are low. While fees are part of the picture, what's important is evaluating the services you receive for the fees you pay. The key is Value. If a representative helps you see your goals clearly and provides steps to help you secure a comfortable future, then that representative is worth compensating.
Many investment specialists provide a wide range of planning services for their investors, which would be expensive if purchased on a fee-for-service basis. An experienced and educated representative will often provide the time and expertise to put together such plans as a value-added extra so that you only pay the fees built into the investment products. That's an unbeatable bargain.
Still wondering if what you get is worth what you pay?
There should be no secrets since all representatives are required to make full disclosure of how they are paid and what fees are associated with the investments you purchase. It is also in the prospectus you receive when you make a mutual fund purchase.
Look for an investment specialist who helps you avoid extra fees, makes solid recommendations, provides valuable services and benefits when you do. If your representative provides good value, be happy and spread the news!
Elaine Kelly, MBA, CFP, FMA, is a Financial Planning Specialist with the Niagara-on-the-Lake branch of Meridian Credit Union. More articles can be found at www.meridiancu.ca. Call 905-688-7777 with questions or comments. Copyright Meridian Credit Union 2004.
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