Adrian Mastracci, president of KCM Wealth Management, says “Every investor ought to check the prospectus section labelled ‘Fees and Costs’ of each mutual fund owned or being contemplated. This establishes the investment costs payable. However, some costs, such as trading costs, may not be included in the MER."

Vancouver, BC (July 26, 2004): Randomly asking investors what costs they incur for their mutual fund investments is an interesting assignment. Their answers might surprise you.

Adrian Mastracci, investment counsel at Vancouver based fee-only KCM Wealth Management comments, “Many investors still believe that they incur no costs for their mutual fund investments. Now a zero cost is a very desirable concept. And I thought the free lunch had become extinct.”

“We all pay fees for investments,“ remarks Mastracci, “If not, where can I get information on this bonanza and tell my clients about it?”

“Investors that come in for the initial meeting with me have provided the answer,” says Mastracci, “The fact that investors do not receive invoices for the mutual fund investment costs has much to do with this perception.”

”You know the drill: out of sight, out of mind ,” remarks Mastracci, “But in reality, there are investment costs paid for each mutual fund owned.”

“It’s just that they are paid directly from the mutual fund to the fund company,” continues Mastracci, “Sadly, I’m tossing in the towel and waving goodbye to the non-existent free lunch.”

“What this perception says is very revealing. Investment costs paid for purchasing, holding and selling mutual funds are not well understood by many investors,” mentions Mastracci.

“Therefore, I have put together a tale of two different investment fees,” indicates Mastracci, “A summary of two choices available to investors that demonstrate substantial differences based on costs.”

“One pertains to a portfolio of mutual funds, as in the portfolio that an investor typically shows me at the initial meeting,” explains Mastracci, “The other applies to fees for the portfolio that I suggest as investment counsel.”

“I’ve selected portfolio values of $250,000, $500,000 and $1,000,000 for the fee dialogue,” notes Mastracci, “I’ll explore the two differing investment fees on the after-tax basis.”

First, an overview of the two portfolio approaches:

1. Mutual Fund Portfolio

When investors come in for the initial meeting, it’s not uncommon for their portfolios to hold 10 to 25 mutual funds. The management expense ratios (MER’s) typically hover in the 2.5% to 3.5% range.

Front end loads or deferred sales charges usually apply. The equity component varies upwards of 70% to 90% with a securities overlap (similarity of holdings) in the 40% to 70% area.

Besides not fully grasping the applicable investment costs, most investors don’t have a written investment plan. They spend too much time selecting the investments and too little time establishing the policies they ought to be following.

They also know little about their investor profile, their capital needs for the retirement years, why they hold the selected investments and the rate of return required to achieve their goals. It’s like building a house without the blueprint.

The MER’s they pay are usually not deductible for tax purposes. The average fund MER of 2.6% is used for the investment cost calculations. Other costs that may apply are not included.

2. Our Investment Counsel Portfolio

A client specific, written investment plan is prepared and implemented. The applicable investment policies, suitable asset mix, risk tolerances, diversification and required income draws are captured in the plan. Periodic monitoring, review and rebalancing are provided after the implementation.

The investment plan is co-ordinated with the investor’s retirement, estate, income tax and business planning matters. A major focus is on asset allocation.

The portfolio consists of index funds, exchange traded funds and fixed income ladders. A balanced investor profile is assumed with 50% invested in equities.

Our professional fee is invoiced directly to the investor and is not dependent on the investments suggested. Two-thirds of our investment management fee is assumed deductible at the 40% tax rate.

A non-deductible investment MER of 0.25% is included in our total fees shown. Our first year fee contains the investment plan costs.

The fee contrast of the two approaches is summarized in the following table:

“Every investor ought to check the prospectus section labelled ‘Fees and Costs’ of each mutual fund owned or being contemplated. This establishes the investment costs payable,” suggests Mastracci, “However, some costs, such as trading costs, may not be included in the MER.”

“There is a fundamental difference in incurring the investment costs ,” outlines Mastracci, “Investment counsel is not paid by commissions.”

“Investors have to assess what is best for their situation,” summarizes Mastracci, “That will provide value for the fees paid.”

NOTE: The information provided above is intended for general informational purposes only. It does not constitute advice for anyone's specific situation. Everyone should always first consult directly with their advisors to determine the appropriateness of any information contained above before taking any action. KCM Wealth Management Inc. assumes no responsibility for any loss or damage arising from the use of, or reliance upon the above information.