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Our world isn’t getting any cheaper. And yet, mainstream investment firms are making it harder for us to get ahead. They charge hordes of fees, which they often bury in legalese. Consequently, your money doesn’t grow nearly as much as it should.
Fortunately, emerging fintech startups has begun to minimize these charges. Below, we’ll educate you on the fees investment firms charge. And, after that, we’ll help you pick an ultra-low-cost firm.
Let’s get started.
Investment Fees Eat Away at Your Future
You don’t want to spend the rest of your life behind a desk – nobody does. That’s why you’re socking away a significant chunk of each paycheque.
However, if your nest egg were growing at a decent clip, you wouldn’t be reading this. Instead, your investments are limping along at a pathetic rate. Why is that?
There are many reasons for this. For starters, the “experts” at your investment firm might be underperforming the market. That’s a real concern, and it’s something that you should always be on look out for. However, that’s not what this article is about.
In this article, we’re shining our spotlight on excessive investment fees. Because of them, nest eggs grow slower than they should. Investment firms skim capital off the top of your funds for various reasons. Let’s explore the most common fees they charge.
Also known as an annual account fee, investment firms charge the custodian fee once per year. Tax-related reporting is the most common reason given for this charge. However, if you invest with a firm that charges percentage-based asset fees, they often waive this charge.
Investment Management Fees
Firms assess these fees as a percentage of total assets under management. Many mainstream firms charge investment management fees of 1-2% per year – or more. Typically, brokerages deduct these fees every quarter. So, if you have $50,000 under management at 1% per annum, your firm will take $125 every three months.
What are these fees for? According to investment firms, they cover the consulting services they offer. These include things like financial & estate planning, investment consulting, and more.
Also known as internal expenses, expense ratios are taken out of invested capital. For instance, a firm that charges an expense ratio of 1.5% will deduct $15 per every $1,000 invested, once per annum. So, if you invest $10,000 in a given year, this firm will divert $150.
What do brokerages use this money for? Most use expense ratios to pay for operational costs. Generally speaking, they provide a pot of cash that pays for everything from salaries to keeping the lights on.
Want to make trades yourself? Many brokerages allow you to do exactly that. While they don’t charge the high management fees that mainstream brokerages do, these firms still make money just the same.
To earn their bread, they charge transaction fees. For every trade executed, they’ll charge a one-time fee. Often, these fees will range between $10-$50 per trade.
Front-End Load & Surrender Charges
When you invest with a mainstream mutual fund brokerage, you don’t buy individual stocks. Instead, you buy into Class A or Class B mutual funds. In these, the firm pre-selects stocks that align with the fund’s goal.
What’s the difference between Class A and Class B? With Class A mutual funds, you pay a front-end load (or a commission) upfront. So, if a Class A fund costs $20 per unit, and the front-end load is 4%, they’ll deduct 4% of its value right off the bat.
When you invest in a Class B mutual fund, the same commission process happens, but in reverse. When you sell your Class B mutual fund shares, your broker will impose a surrender charge (AKA a back-end load). Let’s say you sell a Class B share at $50/unit. If the surrender charge is 5%, you’ll give up $2.50 per unit to your broker.
Minimize Fee-Related Losses – Sign Up for an Ultra-Low Fee Brokerage
Excessive brokerage fees can eat away at your principle. Over the long-term, this can cause you to fall short of your goals. Want to spend extra time in the workforce? Nobody does.
To illustrate this fact, let’s run a simple scenario involving two firms – Broker A and Broker B. Broker A has an expense ratio of 2% per year. Meanwhile, Broker B has an expense ratio of just 0.5%. Let’s assume you invest $10,000 per year and get returns of 8% per annum.
In year one, you invest $10,000. Broker A takes 2% or $200 away, leaving $9,800. After Broker B takes its 0.5% fee, $9,950 remains. With 8% annual growth, you’d have a year-end balance of $10,584 with Broker A, and $10,746. After two years, you’d have $22,014 with A, and $22,351 with B.
As the years go by, the gap widens. At year one, it was around $160. By year five, it’s more than $1,000. At the ten year mark, that chasm sits at more than $2,200. Compound interest is powerful – but it’s even better when you’re getting the best possible deal.
So, you ought to select a broker that charges lowest possible fees, while still delivering needed services. Below, we’ll discuss low-cost brokerages in Canada that deliver top-shelf results for their customers..
Which Brokerages Offer the Lowest Fees?
There are more than a half-dozen major mutual fund houses in Canada. However, we only consider a handful of these to be real low-fee brokerages. The firms mentioned below keeps charges low while delivering excellent customer service.
Since 2000, Qtrade has served millions of Canadians. Thriving (never mind surviving) for decades is not easy for any business. But, thanks to Qtrade’s free ETF buying & selling policy, they’ve managed to do just that.
It’s no wonder that Qtrade is rated #1 in Canada. But, there’s more to their success than free ETF trades. With their educational tools, Qtrade makes it easy for novice investors to learn the ropes. And, whenever anything goes wrong, their customer service department is there to make things right.
However, Qtrade’s fee structure is their standout advantage, does not charge fees for mutual fund trades. For individual stock transactions, they charge $6.95 – $8.75 per trade – that’s below the industry average.
Founded months before Qtrade, Questrade has been Qtrade’s longtime rival. With similar names, people frequently mistake these companies for each other.
However, these brokerages are indeed different. For instance, Questrade’s Forex trading platform is one of their biggest differentiators – Qtrade doesn’t do FX trades. Also, if you trade enough equities, you can get their per trade fee as low as $4.95. Lastly, unlike Qtrade, they lack an inactivity fee.
However, Questrade does charge for mutual fund trades – it’ll cost you $9.95 each time.
Wealthsimple Trade is Canada’s most significant low-fee newcomer. In just six years, this service has managed to attract more than 175,000 customers. They’ve done this by doing two things.
First, they don’t charge a commission on trades. You read that right – you can move ETFs and stocks for nothing. To make money, Wealthsimple charges a 1.5% premium on CAD/USD and USD/CAD conversions.
And second, they have no account minimum. If you want to get started with $50, you can. By doing this, Wealthsimple has allowed everyday people to access equity markets easily.
The More You Invest, the Greater the Returns
We live in an uncertain world. As such, it’s never been more important to save for a rainy day. The brokerages recommended above all have their pros & cons. However, any of the three will allow you to build a nest egg quickly.