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Slice you way to a more fruitful portfolio

The easy way to improve investment returns in tough times: Pay less in fees.

Fees are an unavoidable part of investing and, ideally, they're a fair deal when viewed against the investment returns and advice they buy you. But at times like these, when even well-balanced portfolios are struggling, fees are like a sponge soaking up precious drops of investment gains.

The investment industry effects an attitude of monolithic obliviousness to fees, but it's just a pose. We know this because Investors Group, one of the largest mutual fund companies in the country, announced recently that it will cut the cost of owning its products starting next month.

Let's see if we can keep the fee-cutting momentum going. Spend a few minutes this weekend finding out what you're paying for fees and advice, and then assess the value in light of your recent returns. Make changes where required.

Last week's Portfolio Strategy column featured a survey in which a dozen investment industry pros offered their views on returns over the next 10 years (read it online: Even the optimists see a few tough years ahead as we work through today's global economic problems.

The tough investing environment does seem to have made investors more fee-sensitive. At Investors Group, one of the highest-cost fund companies in the Canadian market, net fund sales came in at $175-million for the first quarter of this year, down from $504-million a year earlier. In the final nine months of last year, more money flowed out of the company's funds than in.

Murray Taylor, Investors Group's CEO, said in announcing the fee cuts that there has been greater consciousness of costs in an investing environment of low interest rates and volatile stock markets. As a result, the company will lower fees by 0.05 to 0.4 of a percentage point on funds accounting for more than two-thirds of its assets.

IG says its fee cuts will take it from the high end on costs to middle of the pack, but this is still a hugely important development because it shows that fund companies can be influenced by investors who include fees among the factors used in selecting funds. The more investors take their money out of high-fee products, the more pressure there will be to cut fees.

Lower fees won't mitigate the complaint some investors have that fund companies and advisers receive their fees regardless of end results. I've come across just one exception (glad to hear from readers of any others) - Avenue Investment Management - where the standard fee is 1.5 per cent for accounts with $500,000 or more in assets. In years where returns top 10 per cent, the firm charges a performance fee that adds as much as an extra percentage point in costs to clients. In years where clients lose money, the fee is halved.

"It's about trying to be fair," said Paul Harris, partner and portfolio manager at Avenue. "This is the only industry in the world where you can give somebody subpar performance or do a poor job and still get paid for doing that poor job."

Avenue charged a performance fee in 2005, 2006, 2009 and 2010; it halved its fees in 2007, 2008 and last year. "It hurts us to cut fees, don't get me wrong," Mr. Harris said. "Our view has always been, it should."

Ask your own adviser to discuss fees in light of lower returns. Can you expect any willingness to cut costs? "Truthfully, no," Doug Trott, president and CEO of PriceMetrix (a software firm that tracks advisory fees), said in an e-mail. But at least your adviser will understand the importance you place on low fees.

Never let anyone in the investment industry talk you out of the importance of fees in the process of selecting advisers and products like mutual funds.

In The Little Book of Common Sense Investing, index investing pioneer John Bogle uses the example of a mutual fund with a fee of 2.5 per cent. If the fund makes 7 per cent, the fee eats up 40 per cent of returns; if inflation squeezes the real return of the fund to 4.5 per cent, the fee eats up almost 60 per cent of gains. "The fact is that lower returns harshly magnify the relentless arithmetic of excessive mutual fund costs ... ," Mr. Bogle writes.

Two clarifications are needed here, the first being that fund returns are reported on an after-fee basis. Unless you're paying attention to fees, you'll never know how much of a bite they took out of your fund returns. The second is that Mr. Bogle is a harsh critic of mutual funds. He founded the U.S.-based Vanguard family of index funds, which are able to charge very low fees because they track major stock indexes and employ no stock-picking fund managers and research teams.

Do-it-yourself investing using index funds or exchange-traded funds is cheap, but it's equally valid to pay more in order to work with an adviser. The key is to get value in areas such as:

Competitive returns: Falling below benchmark stock and bond indexes in the short-term means little, but long-term results should be competitive.

Risk: Funds and advisers can earn their keep by taking the sharp edges off stock market volatility.

Cost of ownership: Compare what you pay to the cost of other products and advisers (see panel); the higher the fee, the better a fund or adviser has to perform to generate value for clients.

Other fees: If you wanted to sell a mutual fund, would you incur a deferred sales charge?

Advice vs. sales: Advisers who earn their fees put your investments in the context of a big-picture financial plan that considers your current position and your goals.

Confidence: In today's uncertain markets, do you feel you're in experienced, capable hands with your current adviser and with your current investment products?

Reporting: Is your investment firm or adviser in the minority that provide account statements with enough information and clarity to assess both the fees you've paid and your returns?

Stock market returns will undoubtedly surge once the current global economic mess is fixed. Get your investing fees in hand now and you'll keep more of those gains when they come.

For more personal finance coverage, follow me on Twitter (rcarrick) and Facebook (Rob Carrick).



To acquaint yourself with fees your mutual fund charges

Consult the Fund Facts document available for all funds

To see how your mutual fund fees compare

Consult monthly fund reviews on including category average fees

How your ETF fees compare

Use ETF screener tool on the ETF Insight website

How the fees you pay your adviser compare

Read "Revealed: the Lowdown on Adviser Fees" (March 24 Portfolio Strategy column)

How your online brokerage fees compare

See 13th annual Globe and Mail ranking of online brokers

To analyze overall portfolio performance

A guide to assessing your portfolio by Tom Bradley, president of Steadyhand Investment Funds

To see how fees erode returns fund fee calculator

© 2007 The Globe and Mail. All rights reserved.

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