Watch out for mutual fund fees, investor advocate says

With the March 1 deadline for 2012 RRSP contributions looming, some people may berushing to buy mutual funds to get the tax deduction.

But financial watchdogs say people should be warymany of those funds charge their customers high fees. Canadians tend toget hit withhigher investor fees than residents of other countries.

Those fees arein the fine print, with names like "management expense ratios" and "trailing commissions"back- and front-end fees. All of them are designed to give a mutual fund advisor a cut of the customer's profits.

Some investors, such as Saskatoon's Ginette Kamieniecki, admit they have only a vague idea of what's being charged.

"I haven't really noticed anything high, but maybe if I paid attention ... I don't know," she told CBC News.

But according to Ken Kivenko, a small investor advocate and writer, these fees shave an estimated $25 billion a year off what Canadians are trying to save.

"Every year, a certain per cent comes off it. And over 20, 30 years what people don't realize that what sounds like 2per cent really can reduce the amount you're going to get by half."

According to Kivenko, 2per cent might have been easier to swallow when the markets gave 12 per cent returns, but that's not happening right now.

"When the market's making 5 or 6 per cent and you're paying 2, and you've got taxes and inflation, basically you're ending up with nothing," he said.

Right now, financial advisors don't have to tell their clients all the ways they make money from mutual funds.

Kivenko believes that should change, with better rules for disclosing fees that provide answers in dollars and cents.

Fivetips on how to make the most of mutual funds:

1. Avoid Deferred Sales Charges. These tie customers to mutual funds untila fee schedule ends. Some are two or three years, some last as long as seven years. It could lead to hefty charges to get out of amoney-losing fund. Some advisors say they won't even sell these anymore.
2. Avoid Up-Front Fees. If you have $10,000 to invest, a typical five per cent 'up-front' fee would mean you only get $9,500 of your dollars working for you. This willhamperpotential returns.
3. Negotiate with your advisor.Some advisorscharge by the hour, making itclearwhat you arepaying for. In these cases, pay close attention to any mutual funds that haveadditional fees and commissions.
4. Examine existing funds. If you already have a fund with fees, look at how that fund is performing after taking into account the fees you pay.If your fund is not doing well enough to justify the fees, consider dropping it.
5. Be careful with 'do-it-yourself' services. Services that do not include an advisor may still involve fees for the funds you choose, on your own. Also, watch the frequency of your activity asindividual transaction fees can add up.

(Sources: Canadian Fund Watch; Ontario Securities Commission; CBC Marketplace)