Q&A With Gordon Pape: Are Mutual Funds More Expensive Than Stocks?
A financial advisor may be compensated in one of several ways. Photo: EschCollection/Getty Images
Financial expert Gordon Pape explains the cost difference between mutual funds and stocks.
Q – The cost of buying a mutual fund from a company is not clear. I understand the MER a fund company such as Fidelity charges but also what do the company and advisor that sells the funds charge? This piles up over a 20-year period. It costs a lot more than just buying individual stocks, would you agree? – Dallas W., Reston MB
A – The MER includes all charges from the company including management fees, trading costs, etc. It’s an annual charge and, yes, it can add up to a lot over time.
The advisor may be compensated in one of several ways. These include salary and commissions. Or, if you have a fee-based account, a small percentage of your total assets (typically 1-2%) are paid annually for the advisor’s services. Ask the advisor how he/she is compensated and what the cost would be to you.
Are mutual funds more expensive than individual stocks? It depends. If you have a fee-based account with a broker, you’re paying an annual cost for it. If you don’t have a fee-based account and you trade a lot, commissions will add up, even if you use a discount broker.
You need to look closely at your investment activities and decide which approach is most cost-effective in your case. – G.P.
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