Investment Fees

“I don’t like money, actually, but it quiets my nerves.” — Joe Lewis

From an early age we have been told that money cannot buy happiness, but most of us have also observed that poverty certainly brings unhappiness.

When investing money, the personally injured (and indeed, all of us) need to consider the fees levied. How much are they? Are we getting value for our money? For the purposes of this brief review, I will focus on mutual funds and annuities.

Many, including myself, find mutual funds an easy and attractive way to invest. They bring an inherent stability that is advantageous to an individual investor. But, they require vigilance and study.

Historically, mutual funds had high front-end loads of about 8% - 10%, as well as ongoing charges for the duration of the investment. Over the years, these front-end charges have been lowered, but in their place higher annual fees and punitive withdrawal penalties have been introduced. The annual fees are often un-capped and they can be expensive - 1.5% to 3% per annum is quite normal - furthermore, they can be raised after you invest and are levied even if the fund loses money. Remember, if your portfolio gains 8% a year and your mutual fund fees are 2% a year, your fees account for one quarter of your gain. (Over a 40 year investment, 2% per annum can be an extraordinarily high charge.)

Then there is the matter of income taxes. Many people forget that as recently as 1970, Ontario’s top marginal tax rate was dropped from 82.4% to 59.5%. Taxes are unpredictable and can be changed as to amount and how they are levied against interest, capital gains, and dividends. (The structured settlement is not taxed at all so there is no fear that changing tax rates will provide an unpredictable investment in the future.)

Annuities, unlike other investments, do not require the issuing of a prospectus. The government’s regulatory agencies are confident that annuities will perform as promised since the risks are transferred to the insurer and are therefore, not borne by investors.

Annuities do not carry any annual or ongoing fees. Annuities have front-end loads. These one-time total charges cover the broker’s commission, all of the life insurer’s administration fees and other costs, as well as the life insurer’s anticipated profit. From the perspective of the investor, the annuity incomes which he is shown are completely net of these one-time charges. This enables investors to easily compare quotes from different life insurance companies. (The investor wants the highest income in the market.) It must also be remembered that structured settlement annuities, in particular, give rise to no tax liabilities.

The profoundly injured have zero tolerance to risk. Rehabilitation requires all the energy a family can generate. To be anxious about investments can act as an impediment to recovery.