The Price You Pay For Mutual Funds

Management Expense Ratio (MER)

If I were to ask you what you’re invested in, many would say they have mutual funds from their banks or investment companies.

If I ask you how much it costs you every year to have these mutual funds, most would say “nothing.”

Step back and think about this.

Are all these companies and their financial advisers working for free to ensure your financial success?

Are all these advisers working for non-profit companies?

Management Expense Ratios

Enter MERs (Management Expense Ratios).

It includes expenses that are incurred to operate the mutual fund, such as:

  • investment management fees,
  • marketing and administrative fees, as well as…
  • the fees they pay to the advisers that sell the mutual funds (trailer fees).

They are expressed as a percentage of your mutual fund’s value, and this is the yearly cost of your mutual fund.

Never heard of them? Not surprised. Most are unaware that MERs even exist!

These fees are subtracted off the fund return every year, whether or not the fund makes or loses money.

What does this mean? Say you have $100K invested in mutual funds with a MER of 2.35%, which is the average MER in Canada (based on Morningstar data)...

How much does this cost you every year?

$2,350!

Every. Single. Year.

Here’s the thing: We live in a country that provides mutual funds with some of the highest MERs in the world. (More on this later. But just for comparison’s sake, the average MER in the US is about 1.3%).

The stock market moves up and down so your mutual fund value will increase in some years, and decrease in others.

The one thing that remains consistent is that the mutual fund will take their $2,350 (approximately, the 2.35% is based on your fund value, so if your funds go up, you will be paying more than $2,350) every year. Without fail.

Own it for 5 years, and you would have paid the mutual fund company $11,750. Shocking isn’t it?

This doesn’t take into account the other fees (called loads) that are slapped on as well (front loads, back loads, deferred sales charges).

But let’s focus on one thing at a time.

Related: How Compound Interest Works

Case Study

So let’s assume we invest $100K in Franklin Templeton’s Quotential Balanced Growth Portfolio at the beginning of 2012 and did not touch it for 5 years.

To simplify the calculation, we will assume that the annual cost is based on the value at the beginning of the year (ie: for 2012, the annual cost is $100K x 2.31% = $2,310).

 

Year Beginning of year Total Return MER Net Return End of year Annual Cost
2012 $100,000 8.71% 2.31% 6.40% $106,400 $2,310
2013 $106,400 17.21% 2.31% 14.90% $122,254 $2,458
2014 $122,254 9.71% 2.31% 7.40% $131,300 $2,824
2015 $131,300 7.51% 2.31% 5.20% $138,128 $3,033
2016 $138,128 4.51% 2.31% 2.20% $141,167 $3,191
            $13,816

AHHHH numbers!

For those who hate numbers, ignore the calculation and skip right to the comments.

For those who feel naked if you don’t have your trusted calculator with you, please confirm my calculations!

Shocking Result

Ultimately, we have $141,167 at the end of 5 years, which results in a gain of $41,167 from our initial $100,000 investment.

“Well, that’s not too bad! I didn’t have to lift a finger for that extra $41,167!”

BUT, how much did the mutual fund company earn over the same 5 years?

$13,816.

I wasn’t able to track down what Franklin Templeton pays its advisers to sell us this fund (it can be found in the prospectus but my Google skills failed me), but I’ve found that the trailing fees could be up to 1% of the asset value for every year you hold it. So we’ll just make this assumption for this analysis.

What’s the verdict?

You make $41,167 over 5 years, and your trusted financial advisor pockets over $5,980 made off of your hard earned money. Sweet deal, hey? Sign me up!

Do you know how much you’re paying?

But first...Why does Canada have the some of the highest MERs in the world?

Cause we’re willing to pay for it.

If we’re willing to pay for it, why in the world would a company reduce their fees? Voluntarily reduce the amount of money that goes into their pockets?

As investors, we need to become aware of the fees that we are paying. And choose funds with lower MERs.

What frustrates me the most is that most people do not even know what they’re paying every year!

If the investor is fully aware of the MER and is willing to pay it because they believe that the fund manager will outperform the market, then kudos to them.

Unfortunately, most are just blissfully unaware. Pretty expensive bliss though, hey?

So how do you find out how much you are paying?

The fees are disclosed in the prospectus and annual reports that EVERYONE reads, right? I found a simplified prospectus – it was ONLY 224 pages.

Buried in there is all the information about how much the mutual fund is ACTUALLY costing you.

Buyer beware, right? Otherwise, a quick search on Google should result in some answers.

CRM2 - Disclosure Finally!

Fortunately, in Canada, CRM2 (Client Relationship Model Phase 2) has been introduced.

What is that? Sounds like a Star Wars droid to me! It means that consumers should now be receiving more disclosure with respect to the mutual funds they own.

Dealers have until July 14, 2017 to deliver these reports to investors, which now must show how much money was paid to the dealer on the investor’s account during the previous year as well as the performance of the client’s investments.

Definitely a step in the right direction…

But apparently, according to this article, several billion in fees that Canadian investors pay will not be found on these reports.

Related: The 5W’s of Investing

Now What?

Some final questions:

  • What mutual funds do you currently have?
  • What are the MERs that you are paying?
  • Have you received your CRM2 report yet?
  • Did you know that this was coming? If you have received it and actually opened and read it, what was your reaction to it?

Disclosure: Some links in this article may be affiliate links. We're letting you know because it's the right thing to do. Here’s a more detailed disclosure on how HTS makes money.

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Comments

Lance @ My Strategic Dollar's picture

No doubt mutual funds drain the long-term potential of your investments. Thanks for sharing the breakdown!

July 04, 2017 @ 10:45 am
Jonathon MacLeod
Jonathon MacLeod's picture

My MER's for the mutual funds I own range from 0.33-0.5%. I use TD's e-series funds as part of a self directed account. A little more work but for very cheap funds. While not a Mutual fund I also own several exchange traded funds (ETFs) through Wealth Simple with MER's ranging from 0.05 to 0.15%. I also pay 0.5% on top of this for their management fee as a robo-advisor. The only other mutual fund I own are through my work RRSP (I can't choose my provider for it, but my employer uses Primerica) which are 2.28% - every year I transfer out my free allotment of 10% of total shares as well as the numbner of shares that result in a deferred sales charge of no more that 0.5-1% to the other accounts I own to keep more investment money to myself. I have yet to see my CRM2 reports. If I remeber I will try and reply to this post for my thoughts.

July 04, 2017 @ 11:42 am
Cheryl's picture

I'm not too thrilled with MERs and mine range 1.59% to 2.24%. 2/3 of my funds are for income and growth so I receive a good income each month and the growth is outperforming the fees, so for the time being and hopefully for the future, I stay ahead. I have ETFs with much lower MERs and stocks balancing my portfolio. I will say I have no idea how much the MER on my Tangerine mutual funds are but I only have about $5000 in there and I don't feel like logging in to their website to check, but I know they're always saying their MER is around the lowest in the industry. And now that you mention it I don't believe I received a CRM2 report from them.

July 04, 2017 @ 12:11 pm
Vito
Vito's picture

Tangerine charges 1.07% for all their mutual funds.

August 15, 2017 @ 10:47 pm
sandra
sandra's picture

hi Thanks for the very informative post! I am going to go through my funds to check out the MERs- you mention back and front load but I don't see an explanation for what that means-- how do I know if I have to pay that and what is it? thanks

July 04, 2017 @ 3:32 pm
Marpy
Marpy's picture

Thats the problem with mutual funds - You put up the money and the only ones that are guaranteed to get paid are those who run and sell the funds. The investor gets whats left over profit wise if anything. As well, the MER are not all the expenses that the investor may have to pay, Trading fees, early redemption fees, and other fees may not be included in MER's. They have a huge number of these funds and most of them can not even match the return of the index they are supposed to be following. Thats pretty bad for something that is supposed to come with professional management!!!professionals at making money for them selves I suppose!!

July 05, 2017 @ 3:05 pm
Robyn
Robyn's picture

I am meeting with our financial planner in the next week or so. I am not happy with their service (or lack of) and am wanting to switch to a new advisor - any suggestions from the group? Thanks!

July 06, 2017 @ 2:25 pm
Robert
Robert's picture

When selecting a financial planner one question you should ask is "How are you being paid?"
Does the mutual fund pay them? or
Do you, the customer, pay them?

If the mutual fund pays them, then they are not necessarily working in your best interest...these 'financial planners' are really more of a sales person. The more they sell you (tell you to buy, or to move investments, etc.) the more they make. This is not to suggest all are bad.
However, any financial planner that pushes you towards a DSC (declining sales charge) fund is not working in your best interest.
There are many big name investment groups that operate this way. Most of these rely on the ignorance of their customers in order to sell them funds that are not good for the customer, but makes the group and planner money.
I've met with a few planners/advisors that fall in this camp. I knew at least as much or more than they did about financial planning. So, after talking to them, it was obvious they were only talking to me to get a sales commission.

If you are paying a financial planner and not the mutual fund, you'll need to do research. Just because you're paying them doesn't mean they are good. There are many out there, they are not cheap, but a good one will help you and not their own wallet.

Good Luck

July 12, 2017 @ 11:04 am
Wes
Wes's picture

This is why I invest my own money using ETFs and individual shares. I know this isn't for many people. One suggestion I tell people is Saskatchewan Pension Plan. It has an MER of about 1% which definitely isn't the lowest out there, but the return is pretty good and on top of it, you can use your credit card to contribute earning you points and miles on investing your money long term. Mind you, you can't invest more than $2500 a year and it is only for RRSP, but I find it a great alternative especially for those who don't have the confidence to do DIY investing.

July 12, 2017 @ 12:35 pm
Vito
Vito's picture

I have never heard of a plan that allows you to use your credit card to invest, I think that's amazing! Talk about earring rewards/points!

August 15, 2017 @ 10:54 pm
Nicole
Nicole's picture

I am fully clued up on mutual fund fees and have invested in couch potato etc portfolio this year. However, saying that I have since met with a financial advisor who, with lots of resistance from me, has shown me mutual funds that have been outperforming my etf portfolio for quite a few years - ran a historical comparison. I then, even knowing fees average at 2.4 have signed up to do those. I do not agree with such a high MER, I hate the idea of it...but at the same time, if I end up earning more than my passive portfolio then fees don't really matter. Please correct me if I'm wrong, new investor here still struggling with where best to put my money.

August 02, 2017 @ 8:43 pm
Vito
Vito's picture

Hi Nicole,

There are funds out there that have performed better than the index benchmark, however, ask your "advisor" if that mutual fund has out-performed the index market say beyond 10 years? Ask if its performed that way, for the last 30 years, heck, ask for 20 years, I bet that it hasn't or the fund "didn't exist" 20 or more year ago.

Something to think about. Don't get blinded by their smile or colour pie charts/spreadsheets, they are there to make money from you. Best quote I've read (which is popular) "no one cares about your money, more than you".

August 15, 2017 @ 10:58 pm
Vito
Vito's picture

I had an RRSP growing up as a kid because my dad told me its important to start one, and it has 2 funds in and one fund's MER is 2.21% and the other 1.97%. After educating myself, switched over to ETFs following the index with the Canadian Couch Potato and other influences along the way.

My ETFs are as follows:
XAW
VCN
VSB

All three ETFs combined, give an average MER of 0.13%. You can't get cheaper than that!

I also have my employer matching RRSP contributions through Manulife and thankfully follow the index with a slightly higher MER at 0.295%, but still far less than the average 2.3% MER in Canada.

I am also a hybrid investor, in that I also dabble in individual stocks, just because I like to and granted far risker, but also because I want to create a passive income by dividend investing.

Regardless, investing is a marathon, a long-term game, buy it and keep it forever! (aka. John Bogle approach)

August 15, 2017 @ 11:06 pm
Stephen Weyman
Stephen Weyman's picture

That's impressive that you're able to get a 0.295% MER through manulife. Times have changed!

August 21, 2017 @ 9:04 pm

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