Mutual funds provide important benefits. And like all things that offer value, there’s a cost associated with those benefits. The main cost of investing in a mutual fund is captured in the fund’s Management Expense Ratio, or MER.
Watch this video or keep reading for a breakdown of MERs.
How do MERs work?
The MER is expressed as a percentage of the average dollar amount of a fund investment. For example if an investor holds assets of $10,000 and the fund incurs annual costs of $78, the MER is 0.78%.
For illustrative purposes only.
An MER is made up of several components. These components may be different across different series of the same fund. To illustrate, we deconstruct a Series A and a Series F MER.
Embedded advice Series (Series A)
Series A mutual fund MERs include investment management fees, operating expenses and taxes. They also include a trailing commission, which is paid by the mutual fund company to the firm the advisor works for (mutual fund dealer) for ongoing advice, access and service provided to the investor.
Series F mutual funds are available in fee-based accounts and their MER is comprised of investment management fees, operating expenses and taxes. In fee-based accounts there is no trailing commission. Instead, the fee for advice, access and service is charged directly to the investor by the firm the advisor works for.
For illustrative purposes only. * Account fees are subject to federal and provincial taxes.
Pays for professional investment management, fund supervision, operational administration & service support.
Access to the advanced skills and specialized education, experience and professional designations of the portfolio manager and their team of analysts (if there is a team to support).
The fund manager and analysts have access to research reports, company executives, competitor information, market data, specialized analysis tools, proprietary tools and other important data.
Mutual fund managers and analysts dedicate their professional lives to researching and analyzing current and potential holdings for the mutual fund allowing investors to enjoy their time doing something else.
There are different ways to access and pay for advice depending on the series you invest in.
Compensation is paid to the investment dealer organization and financial advisor (trailing commission) who sell the fund and provide ongoing financial advice and service to the investor.
The expertise an advisor provides to an investor, including building financial plans, goal-specific planning, tax planning, fund recommendations, portfolio construction and monitoring and rebalancing.
The infrastructure required of your advisors firm to support the distribution, sales & servicing of mutual funds.
Trade confirmation, account openings and closing, issuance of statements & communications and regulatory compliance activities.
*Please note depending on how you work with your advisor the dealer/ advisor compensation may not be included in the management fees ie. for fee-based accounts the dealer/ advisor compensation is not included in the management fee and is negotiated between the advisor and investor.
Each fund pays an administrative fee that is used to pay for day-to-day expenses including:
- Record keeping fees – financial reports, tax slips and statements.
- Accounting and fund valuation costs – tracking flows in and out of a fund, calculating net asset values, purchases and sales of investments and related investment income, gains, losses and operating expenses.
- Custody fees – holding an investors securities for safekeeping to minimize the risk of theft or loss.
- Audit & legal fees.
- Reports and prospectuses – preparation of these reports.
- Filing fees – cost associated with filing reports and prospectuses with regulators.
Each fund is required to pay taxes on its management & administration fees.
MERs are paid indirectly as they are automatically deducted from a mutual fund. This means that the reported mutual fund performance on your account statement is shown on an after-MER or “net of MER” basis. For example:
The MER for a series of a fund is shown on the fund company’s website and the most recent Management Report of Fund Performance (MRFP), which is a document that is publically available on a fund company’s website. For a breakdown of a fund’s management fee, trailing commissions and operating expenses, see a fund’s simplified prospectus.
The MER typically represents the majority of the costs charged to the fund, but not all. For funds that invest in equities, portfolio transaction costs, such as brokerage commissions and any HST applicable to those costs, are not included in the MER. These trading expenses incurred by the fund manager are expressed as the Trading Expense Ratio (TER) and are a cost of doing business. TERs can be found in the Fund Facts document that is provided to all investors prior to investing in any fund.
For more information about the costs of investing in mutual funds, please speak with your advisor.