How do ETFs work?
Your guide to how ETFs work and whether this type of investment is right for you.
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As with everything, investing comes with a price – you just need to figure out what it is, and whether it’s worth paying for. Many fees are unavoidable, but some can be reduced or completely eradicated with some planning. Find out how to navigate the choppy waters of investment fees to help you make your money go further and compare the fees involved with each provider.
What are the different types of investment fee?
Each broker might have slightly different names for its fees, but in general, these are the ones you’ll come across:
- Custody fee. This is paid to the provider for holding and investing your money. This is sometimes called a “platform fee” or “annual charge”.
- Commission fee. This is a transaction fee. It’s the cost of buying stocks and shares.
- Management fee. This is paid to the fund’s advisor for their advisory and management services. Depending on the company, this fee may also cover administrative services related to the fund.
- Advice fee. This is if you have a financial adviser, so not every platform charges this.
What is each fee for?
These fees can have different names across various platforms. Likewise they can come bundled together or be charged separately to add a bit more confusion. Let’s go into a bit more detail about what each one means.
| Name of fee | Also known as… | What’s it for? |
|---|---|---|
| Custody fee | Platform fee, annual charge | Similar to the management fee and in some instances may be bundled with it. This covers the people responsible for holding and investing your money as well as the people managing the associated legal structure of your investments. |
| Commission fee | Brokerage fee, transaction fee, entry and exit costs, front-end load or back-end load (mutual funds only) | This fee can be charged every time you make a transaction, whether it be a buy or a sell. These fees can be either a set amount per trade or a percentage of the transaction amount. If you are buying and selling lots of small shares, these fees can add up quickly. |
| Management fee | Ongoing charges, fund management fee, total expense ratio (TER), internal expenses, total annual charge (TAC), annual account fee. | This fee is generally paid as a percentage of the managed fund and is paid to the fund’s advisor for their advisory and management services. Depending on the company, this fee may also cover administrative services related to the fund as well. |
| Advice fee | Ongoing advice fee, financial advisor fee | This is the fee you will pay if you choose to seek the advice of a financial advisor to assist you with your investments and the related decision making. |
Know your fees
As we’ve seen, fees vary hugely between brokers. They can also vary between types of investing. Some trusts, for example, may have the management and custodian fees bundled as they will probably be offered by the same provider.
What kind of investing will you be doing?
This is an important question to ask when working out what fees you will pay. Will you buy and sell individual stocks or invest in mutual funds? Will you be dealing in lots of small stocks or fewer big ones? Will you seek the assistance of a financial advisor or go it alone? These are all questions that will affect the type and amount of investment fees you will pay.
How much will I pay in fees?
This depends on how much you’re planning to invest. Obviously, if you’re investing bigger amounts, you will pay more in fees. However you will also (hopefully) be making more profit to hopefully make the fees worthwhile.
If you are “hobby investing”, a term to mean dealing in only small amounts of money, you should be especially careful of fees as they may end up adding up quickly and your return may not be enough to make the fees worthwhile. Some total investment fees can be up to 2% per year or even higher of your total investment value, this will really add up over the years.
If you find a broker who charges 0.5% annually but does very little to help you grow your investment and you find a broker who charges 2% but spends hours and hours working to improve your financial position, then you may actually be better off for paying that 2%.
How can I find out how much I’m paying?
If you’re already investing then ask your broker directly for a breakdown of the fees they charge. Make sure they include all the admin fees and how much you pay in transaction fees per trade.
If you are thinking about trading, do your homework and compare brokers. Remember not only to focus on how much each provider is charging, but also what exactly you get for your money.
Open a stock trading account
Compare some of Canada’s most popular online stock brokers below. Check out our guide on how to buy stocks to learn more on how to get started.
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Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades.
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