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Weekly Insight

How to avoid fees

A lot of financial commentators have slammed Investors Group Inc. lately for raising its fees on mutual funds that are sold with a deferred sales charge.

Not me, though. I think Canada’s largest fund company by assets has done something useful by raising fees at this time of dismally bad returns. Buying funds with a deferred sales charge is a bad move, and the Investor Group fee grab underscores this point nicely.

While you pay nothing to buy a DSC fund, there’s a redemption fee that gradually declines from between five and 7 per cent to zero over after six or seven years. In a perfect world, you’d buy a mutual fund and hold it for decades, thereby making DSC fees a moot point. In real life, there are a number of reasons why you’d buy a fund and want to get out within a few years. Maybe your star fund manager has left, or your fund has gone into a protracted slump that shows no signs of abating. Or maybe you want to get less aggressive with your investing and want to switch to something tamer. You can shift assets within a company’s menu of funds and not trigger DSC redemption fees, but what if your fund family doesn’t offer any good alternatives?

Investors Group’s fee increases are as follows:

To be fair, the new redemption fees for the first few years bring Investors Group into line with what some other industry players charge. In the later years, the company appears be getting somewhat greedy.

If you want to avoid deferred sales charges, you’ll have to look at how you buy funds from your financial adviser. One option is to work out an arrangement where you pay a small upfront sales commission of 1 or 2 per cent and then have complete freedom to sell a fund whenever you want. Or, try asking your adviser about buying funds with no upfront or deferred sales charges.

How’s that possible? After advisers sell funds, they receive so-called trailer fees from fund companies to cover the cost of ongoing service to clients. If you buy a DSC fund, your adviser and his or her firm get half a per cent of your assets in fees each year; with a front load, the trailer fee is up to one per cent.

Still another option is to ask your adviser about low-load funds. Offered by a small number of fund companies, including AIM Trimark Investments, Clarington Funds Inc., and Dynamic Mutual Funds Ltd., low-load funds cost nothing to buy and have minimal redemption charges that decline to zero after just a few years.

As for Investors Group, it’s clearly serving itself with its higher redemption fees on DSC funds. If I were a client, I’d seriously wonder about the symbolism of this.

rcarrick@globeandmail.ca

Find out more about mutual fund fees

Mutual Fund Fee Impact Calculator
See the impact of various mutual fund fees on your investment return over time.

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