What’s The Fee? (WTF!)

A typical Canadian investor holds a fund which produces a 6% total average annual return for 30 years.

Q: What’s The Fee?  

A: 2.00%

B: 33.3%

C: 53%

D: All of the above

The answer is D: All of the above

If you own a fund which generates a total average annual return of 6% p.a. before fees over 30 years, “2%” annual fees will cost you 33.3% (on average) of your total return in any given year and 53% of your total 30 year return!

The current industry method of fee quotation is highly misleading for three reasons:

  1. You make an investment to earn a return, not just to get your money back. Leave your money in your bank account or stuff it in a mattress if you just want to get it back! The benefit you are seeking is to earn a return on your investment. Quoting the cost as a percentage of that return (even if that return is a forward looking estimate) would provide a fairer representation of true “cost versus benefit”.
  2. When a product will be paid for over years or decades, quoting the fee as an amount payable over an arbitrary fraction of that time frame, i.e. one year, is nonsensical. Quoting the fee on the basis of an investment “horizon”, meaning a number of years that will be closer to the projected life of the investment, would present a much more accurate picture to investors.
  3. Annual fee quotations give no indication of how the total amount lost to fees accelerates over time.

By simply revealing the portion of total return an investor actually gets to keep after fees, T-Rex Scores demonstrate the true impact of fees over time.

Fee Transparency

When will the investment industry provide clients with clear, simple summaries of both the full amount and impact of investment fees over time?

Get your T-Rex Score here.

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