Reduce management costs and manage your finances

The vast majority of savers think that when they place their money with a financial institution, they pay between 2% and 3% in financial management fees. Here’s a look at how much you actually pay and how you can protect yourself.

Announced and actual gains

One day I decided to call my advisor at a large local financial institution and ask him why the returns were so low. He told me that it wasn’t ideal because I had conservative investments while the market was doing well, so it was working against me, that I’d still made 3% and that it would go back up.

In short, what you always hear in this case… Fortunately, I’d done the math, i.e. I divided the gains I’d made by the starting amount a year earlier and came up with a rate of 1.2%, even though the market was rising sharply. He replied that it was because he hadn’t included the fees.

This remark gave me the idea of doing a little research on management fees.

The real rates

I’m not a financier, so I turned to specialists and did some research on the Internet. Most of the financial advisors I interviewed told me that management fees average between 3% and 4% in Canada.

Of course, this may vary, and you may pay less, depending on your financial institution, the amount you have, and the conditions offered to you. Some specialists estimate that real fees can rise to 5%, so let’s take a look at the composition of these fees.

First of all, the January 1, 2017 Journal La Presse + published an interview with Mr. Raymond Pouliot : “But if you add management fees, custody fees and transaction fees, which are always hidden in the return, it can easily rise to 3% or 4%, depending on the asset class.” That’s a lot!

For its part, the Canadian Autorité des marchés financiers (AMF) recommends checking the investment fund’s overview of fees, which must include :

• Les frais d’achat de parts et l’impact annuel de ces frais sur un placement de 1 000 $
  • Up to 5% of the purchase value
• Les frais de rachat (appliqués lors de la vente de parts) et l’impact annuel de ces frais sur un placement de 1 000 $
  • They can be as high as 6% in the first year and as low as 1% in the second.
• Management expense ratio (MER)
  • According to the AMF, these fees are deducted from the fund’s assets. As a result, they rarely appear on your account statement, even though they reduce your return. They can vary between 1% and 3%.
• The operating expense ratio can range from 0.1% to 0.5% of the fund’s net assets.
• Transaction fees (RFO): approximately 0.005% of net assets
• Trailer fees as a percentage.

In short, it’s very difficult to find your way through this maze, especially as not all charges, according to the AMF, are visible. The easiest thing to do is to divide the gains you’ve made by the starting amount, if at least you haven’t made any trades, and you’ll have your real gains but not the real costs.

But one thing’s for sure: an investor with a $100,000 fund spends around $4,000 on management fees, and if he has $600,000, that’s going to cost him at least $20,000 a year! You wouldn’t think it, but it’s true.

Many investors rightly believe that the most important thing is not the fee rate, but the income. They’re not wrong, but profits are hypothetical, whereas management fees are not. Institutions generate income whatever the market and even if you lose money!

The solution: manage your capital yourself

The most efficient solution is to manage your assets yourself. In this case, your only costs will be those of the transactions you carry out.

You can do this at your financial institution. For example, Disnat, which is part of Desjardins, lets you take advantage of the institution’s services while retaining your independence in managing your assets. Fees are limited to just over $9 per transaction.

Another option is to go to a stock market training school. In addition to courses, the school provides you with an American trading platform, which costs around $1 per transaction.

Hazards

Cutting costs is all very well, but it’s no use if you’re making losses. It is said that 90% of stock market traders lose money. But they also say that 90% of stock market traders are untrained. We wouldn’t dream of flying a plane without learning how. So why do it with the hard-earned money you’ve been saving since graduating?
Many become discouraged after a few years and give up, saying they’re not good at it. In fact, they’re simply not trained.

Solutions

The classic method is traditional passive investing, which plays on rising share prices. This is the safest mutual fund method, but also the least effective. If a bubble bursts, your financial advisor will tell you to wait and see. The reason is simple. He has no alternative solution, and the mass selling of his clients would contribute to a fall in prices, which would be detrimental to his interests and those of his other clients.

Active investing plays on all movements: up, down, neutral. It’s riskier, but there are ways to protect yourself and, above all, it’s much more profitable. As it goes against investment fund rules, you have to do it yourself.

The methods

There are three ways to play the stock market yourself:

• Day-trading, i.e. you only trade during the day and end the day by selling everything and therefore with cash.
• Swing trading for the medium term
• Cross trading is a combination of the two, invented by Réjean Paul of DayTrader Canada, who registered the trademark.

The means to success

First of all, the first piece of advice for success is to go gradually. You don’t become a champion in a sport overnight. I’d even advise you to start with play money to train.

Next, don’t gamble all your money, and don’t put all your eggs in one basket.

You can’t learn on your own either. It could cost you dearly. So here are the key ingredients to give yourself every chance of success:

• Training on shares and options
• Training in the use of trading platforms
• Tools to help you select the best stocks for trading are available only from certain training schools. But no matter how good you become, only a machine can analyze several thousand stocks overnight.
• Coaching like all champions in sport
• The chance to follow experts at work.

Guaranteed success?

Again, this is no guarantee of success. However, you’ve gone to great lengths to try and achieve the 50% or more returns that some day traders claim.

If you choose this option, start with small amounts. The amount you’re prepared to lose. Build up gradually, but don’t put all your eggs in one basket.

But if you decide to manage your money yourself, you need to give yourself every chance to succeed!

Jean-Pierre Mercier