In the architecture of enduring long-term capital growth, fee minimization occupies a fundamental, albeit frequently under appreciated position. Fees and transaction costs can quietly chip away at returns, reducing the power of compounding returns over time which is what underpins long-term wealth creation. Among SciVest’s foundational investment beliefs , the importance of Minimizing Investment Costs reflects a principled commitment to overall portfolio efficiency and protecting net investor returns..
This post breaks down the different types of investment costs, explores their long-term compounding implications, and outlines research-backed strategies to reduce them across various investor profiles.
The detrimental effect of fees on portfolio growth becomes clear when viewed through the lens of compound return models, where even small costs can lead to significant long-term erosion. Consider two hypothetical investors invested in an identical portfolio:
Over a 30-year investment horizon:
The difference of $94,364, a 23% lower return, is purely attributable to cost differentials: a vivid illustration of how persistent drag coefficients undermine long-term wealth compounding. This underscores the alignment between cost minimization and SciVest’s belief that minimizing investment costs and maximizing long-term compounding are fundamental tools for wealth creation.
Investment-related expenses can be classified along two primary categories: explicit and implicit costs. Awareness and measurement of these elements are prerequisites for any sophisticated cost-efficient strategy.
Alpha refers to the extra return an investment strategy earns above its benchmark. But even a strategy that generates alpha can lose its edge if fees, trading costs, or other frictions eat into those gains. That’s why net-of-fee alpha, the return left after all costs, is the most important measure of performance over a given time period.
Even alpha-generating strategies can be nullified if frictions exceed marginal returns. Hence, net-of-fee alpha should serve as the most cardinal metric of performance over a specific investment horizon.
MERs reflect the annual costs tied to managing a fund, which include asset management fees, operational expenses, and regulatory charges. In the Canadian context:
This gap has prompted a clear shift in investor behaviour: while mutual fund growth has drastically slowed, ETFs have surged in popularity. The reason is simple investors are becoming more fee-conscious, recognizing that high MERs can quietly erode long-term returns. For example, a seemingly small 1.5% difference in fees can result in tens of thousands of dollars in lost value over a few decades. As fee transparency improves, choosing low-cost investment vehicles has become a key strategy for maximizing long-term wealth.
Source: The IFIC 2024 Investment Funds Report
Beyond management fees, two often-overlooked costs can quietly eat into investor returns: trading commissions and bid-ask spreads.
Trading commissions are the explicit fees charged per trade, which have significantly declined in recent years with the rise of discount brokerages, many now offering commission-free trading.
A more subtle, but equally important cost is the bid-ask spread. It represents the difference between the price at which you can buy a security (ask) and the price at which you can sell it (bid). This cost, often invisible to retail investors, represents a liquidity premium captured by market makers. Market makers, who facilitate trades by quoting both buy and sell prices, build in a margin to cover their risk and make a profit. Thus, this spread, especially in less liquid or highly volatile securities, can widen significantly, adding up quickly for active traders. The more frequently you trade, the more these hidden costs compound, silently reducing overall returns.
To minimize these trading frictions, it's essential to be strategic about how and when you execute trades.
In short, by carefully managing trade execution, which is more than just a trading tactic, investors can reduce hidden costs and improve overall portfolio performance.
When evaluating mutual fund investments, it's crucial to understand the various fees that can impact your returns. Load fees are sales charges applied at different stages of your investment:
It is important to note that these fee structures are most prevalent in actively managed mutual funds, where higher operating costs and compensation models for brokers and advisors are common. While these funds aim to outperform the market, the additional fees can erode potential gains, especially over the long term.
Therefore, for cost-conscious investors, no-load mutual funds and low-fee exchange-traded funds (ETFs) present attractive alternatives. No-load funds do not charge front-end or back-end sales commissions, allowing your entire investment to work for you from the outset. Low-fee ETFs, often passively managed, offer broad market exposure with minimal expense ratios, sometimes as low as 0.04%.
By understanding and carefully considering these fee structures, investors can make more informed decisions, potentially enhancing their investment outcomes over time.
While fees are the most visible cost of investing, tax drag the erosion of returns due to investment-related taxes is a more subtle but equally significant factor. Every time an investment distributes dividends or you sell at a gain, a portion may be taxed, reducing your net return. In the Canadian context, understanding how different types of income are taxed is essential.
Smart account structuring can help reduce these inefficiencies.
By strategically placing the right assets in the right accounts, a method known as asset location, investors can significantly lower their overall tax burden and preserve more of their returns.
Investors often compare funds based solely on the Management Expense Ratio (MER), but the true cost of investing goes far beyond that. A fund’s total cost includes not only MERs but also trading commissions, bid-ask spreads, and tax drag. These can quietly eat away at performance if left unchecked. That's why looking at the net-of-fee return, the return after all costs, is far more meaningful than simply comparing gross performance.
In Canada, various ETF comparison platforms make it easier to assess these all-in costs. Look closely at sections detailing fees, turnover rates, and distribution schedules, as these can reveal a lot about the tax and trading implications of a fund.
Adopting low-cost investment approaches can enhance long-term wealth accumulation:
At SciVest, we believe that minimizing investment costs is one of the most controllable and impactful decisions an investor can make. Our transparent fee structure, use of institutional-grade separately managed accounts (SMAs), and focus on tax-efficient strategies contribute directly to higher net returns and better compounding outcomes over time. While markets may fluctuate and performance varies, cost discipline remains a constant source of advantage.
Moreover, we encourage investors to monitor costs over time rather than take a “set-it-and-forget-it” approach. Just as expenses in life can creep up, so too can investment costs, especially in complex portfolios. Regular reviews ensure that each component of your portfolio continues to align with your long-term goals and remains as efficient as possible.
This chart below clearly illustrates the long-term impact of fees on investment outcomes. It compares the growth of a 60/40 portfolio under SciVest’s lower-cost structure with that of a typical Canadian mutual fund account charging 2.19% annually. Over 30 years time, the difference in net returns becomes substantial, with the SciVest's portfolio up over 50% (or ends $259,169 higher), or 50.28% more, than the mutual fund equivalent. In percentage terms, the mutual fund portfolio captures only 58.53% of the gross return of the SciVest portfolio, reflecting a 41.47% drag, while SciVest’s portfolio retains 87.6% of the gross return, demonstrating how disciplined cost structures can significantly enhance long-term wealth creation.
Mutual fund cost source : Balanced Fund Landscape for Canadian Fund Investors (2024), Morningstar
Investment costs may seem small in isolation, but over time, they can significantly impact your portfolio’s growth. From fees and trading expenses to tax drag, being cost-conscious isn’t just prudent, it’s essential. We believe that minimizing investment costs is one of the most reliable ways to strengthen long-term outcomes and build lasting wealth.
Take the first step: Review your current holdings, understand the full scope of fees you’re paying, and explore lower-cost, tax-efficient alternatives that align with your goals.