Taking another look at fees and tax charges.
As you sit by the lake this summer with your toes in the water, you may find yourself thinking, finally, about those financial conundrums that have come up during the year and been dispatched to the back of your mind in favour of more pressing matters. You may find you now have the mental clarity to reflect on such issues – a procedure that explains why many people put off financial decisions, and financial professionals, until the fall.
Below are a few of the most asked questions, along with some pros and cons to be pondered.
Mutual Funds versus ETFs?
The emergence of exchange traded funds has turned the mutual fund industry on its head. You may notice that you have been feeling a little more fee-sensitive in recent years. It’s a fact that the two things that will likely erode your returns, other than down markets, are fees and taxes.
Assuming that portfolio managers running the ETFs and the mutual funds are equally competent, the difference in net returns to the client arise from the managed expense ratios and the taxes incurred by the investments. ETFs have grown in popularity in part because they typically draw lower MERs and also because they trade on the exchange and there is more transparency about the way an ETF trades. You can enter into an ETF at a specific price. When you place an order to buy or sell a mutual fund, you won’t know the price paid or received until the next day. In a volatile market, many people find that unacceptable.
It’s interesting that some mutual funds hold ETFs in them as a way for the mutual fund industry to get on board with this growing market segment.
Tax-free savings account versus retirement savings plan?
If you have enough disposable income, it makes sense to maximize your tax-free savings account and registered savings plan. You may have been turned off of RSPs in recent years due to the lack of performance but it is important to note that the RSP is only the container, not the investment itself.
If you are comparing the two savings plans, your age, the amount you have in RSPs and whether you need a tax deduction will influence your decision. If you’re close to retirement and not concerned with a tax deduction, the tax free savings plan may be the better option while you keep the rest of your savings in a non-registered account. The best way to determine which plan works best for you is to talk with a qualified financial planner.
Fee-based charges vs. commission
Fees can eat away at your returns as much as taxes can. Fee-based accounts will typically offer a lower percentage fee compared to commission or transactional accounts. If you don’t do a lot of trading, it may not be worthwhile to pay a percentage per year. Depending on the institution, you may be allowed only limited “free” trades, or you may be liable for a minimum fee. You need to ask your institution what the terms are. You may not want to paying a monthly fee based on your total portfolio value, but this could be a better option.
Management fees are considered professional fees and are therefore tax deductible whereas commission charges are not. Fee-based registered accounts will often not be charged administration fees. Take a look at the commission that you were charged, as well as the number of trades that you’ve done over the year and compare that with the fee-based structure (after taxes) to determine which charging method is more advantageous for your investments.
Jennifer Snyder and Hannah Giesbrecht are vice presidents and potfolio managers with Giesbecht Snyder Goup at MGI Securities in Winnipeg.