Understanding Mutual Fund Fees

Quinn Waddington - Sep 26, 2016
Given the focus on costs in our industry, we wanted to provide some background to help give our clients a better understanding.  I will discuss the different types of accounts as well as breakdown the complete costs of mutual funds.

Understanding Mutual Fund Fees

Given the focus on costs in our industry, we wanted to provide some background to help give our clients a better understanding.  I will discuss the different types of accounts as well as breakdown the complete costs of mutual funds.

 

Types of Accounts

There are two main ways to pay for the advice of a professional advisor: through a fee-based or a commission-based account. With a fee-based account, a fee is paid each year for the account’s management, often calculated as a percentage of the account’s value. With a commission-based account, fees are based on the purchase and/or sale of the portfolio’s investments. In addition, certain fees are associated with the cost of owning various investment products such as mutual funds.

 

Over the years, the industry has moved towards a fee-based model. Some advantages may include:

Tax-deductible fees
Less bias in recommendations 
Potentially lower overall costs for significant portfolio activity

 

What is an MER?

The costs associated with running a mutual fund are included in the management expense ratio (MER) and charged as an annual percentage fee. There are three main components: i) Management fee – The cost associated fund management, which includes having a dedicated team of professionals who actively research and monitor the fund, making adjustments when necessary to manage risk. The fee may also include a dealer and advisor component, which helps to pay for the services that we provide to our clients; ii) Operating expenses – Various administrative fees, including legal, tax and financial reporting costs; and iii) Sales tax (GST/HST) charged to the fund and depends on the province of residence of investors of the fund.

 

For Canadian equity mutual funds, the average MER generally ranges between 1 percent and 3 percent. Any returns reported by mutual funds are net returns after fees. Mutual funds that are part of a fee-based account often have discounted MERs.

 

What Makes Up the MER?

The following chart illustrates what the fees paid on a mutual fund, with an MER of 2.5 percent, can comprise:

 

The Bottom Line

Understanding the costs associated with your investments is important. More important, however, is that you feel you are receiving value for what you pay.  If you would like to know the true costs of your investments or want information on alternatives to reduce those costs please don't hesitate to contact me at quinn.waddington@canaccord.com or (604) 699-0874.

 

Our objective is to keep your money working as hard as you do which involves fostering investment discipline, managing your portfolio within your level of risk tolerance and maintaining suitable asset allocation. Wealth management also extends beyond investment advice and we have a broader team to support retirement planning, estate planning and succession planning, as examples. Don’t forget that this is all part of our ongoing service to you. We can be contacted at any time and are always here to support you. 

 

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