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I’m trying to find out how much I am paying in fees. I’ve been with the same firm for 20 years – with three different advisers in that time. They tell me I’m paying 1 per cent. How can I verify that this is correct?

I chose this reader’s e-mail (which I’ve paraphrased) because it illustrates an all-too-common problem: Many investors have no idea how much they are paying in fees. Nor do they understand the huge impact that fees can have on long-term returns.

If you’re someone who has fee blinders on, this reader’s story might shake you out of your complacency. It turns out he’s been paying more – a lot more – than 1 per cent.

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I initially suggested that the reader dig through his records and try to find a disclosure of his investing costs. When he couldn’t find any information in his statements, I recommended that he e-mail the firm’s compliance department. The firm has a duty to explain his fees in writing, I told him. That he was still in the dark about this after 20 years with the same firm was unacceptable.

To its credit, the firm got back to him quickly and with a thorough response. The information it provided, however, may have come as a shock. Yes, he was paying 1 per cent in fees annually to the firm indirectly, but this was merely the trailer commissions that the mutual funds were passing on to the firm, ostensibly for the advice the firm was providing.

The investor’s true costs, as measured by the weighted average management expense ratio (MER) of the funds he owns, was actually 2.32 per cent – more than twice as high as he had believed. (The MER includes the mutual fund’s management fee, out of which the trailer commission is paid, plus the fund’s day-to-day administrative costs and taxes.)

Why wasn’t the full MER printed prominently somewhere on his statements? The answer is that firms aren’t required to provide that information. Under rules introduced in 2017 called CRM2 (the second phase of the client relationship model), firms are only required to provide annual statements that disclose how investments have performed in dollar terms, as well as the dollar amount the investor has paid for advice. There is no requirement to list the full MER. (The MER can be found on the “fund facts” document provided by the fund company.)

It’s no wonder many investors are still in the dark. According to a 2017 survey by J.D. Power, less than one-quarter of investors said they fully understood the fees they are paying, and nearly one-third said their adviser made no attempt to explain fees at all.

After the investor learned how much he was actually paying, he e-mailed me with another question: “In your opinion is 2.32 per cent in line with industry standards? Is it a fair fee?”

For an investor who owns mutual funds and works with an adviser, an average MER of more than 2 per cent is typical. Is it fair? Well, I’m sure the firm and its advisers think so. But for an investor, it will take an enormous bite out of long-term returns.

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Many investors do not understand how a couple of percentage points in fees can be such a big deal, so let’s look at a simple example.

Say the market is expected to post a total return – including dividends – of 7 per cent annually over the next 30 years. An investor can either buy an index exchange-traded fund with an MER of 0.1 per cent, or a mutual fund that charges 2.3 per cent. We’ll assume both funds earn 7 per cent before fees, which means the ETF’s net return will be 6.9 per cent and the mutual fund’s net return will be 4.7 per cent.

If an investor puts $10,000 into the low-cost ETF at the start of each year, at the end of 30 years she will have about $991,800. Putting the same $10,000 annually into the high-fee mutual fund, on the other hand, will produce a sum of just $660,800. So, the ETF investor will end up with an additional $331,000 – 50 per cent more than the mutual fund investor – all because of a 2.2-percentage-point difference in fees.

Bottom line: Fees matter a lot. If you don’t know how much you are paying, find out. Then, if you care about having a few hundred thousand dollars extra to retire on, do something about it.

E-mail your questions to jheinzl@globeandmail.com.

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