Breaking down the mutual fund management expense ratio
The topic of mutual fund fees has been getting a lot of attention lately. As mutual fund fees are taken from the entire pool of investor assets and shown as a percentage (instead of as a dollar figure), many people still aren’t completely clear on what these fees are and what they cover.
Although regulators are taking a number of steps to improve transparency when it comes to mutual fund fees (including assigning dollar values for certain fees on investor statements), we thought this would be a good time to provide a high-level overview of some of the things you should know about the management expense ratio (“MER”)…
What is the MER?
The MER can be broken down into three components: (1) management fee, (2) operating expenses and (3) taxes.
- Management fees
A mutual fund’s management fee, which can range depending on the type and complexity of the fund, covers investment management and trailing commissions.
Investment management includes the costs of portfolio managers, analysts, staff, etc. as they conduct research and invest on behalf of the fund’s unitholders, as well as providing ongoing monitoring and making important day-to-day decisions about the management of the fund.
Trailing commissions are paid by the mutual fund manager to an investor’s financial advisor (and to the dealership where the advisor works) for providing professional advice and undertaking certain administrative duties.
- Operating expenses
This charge covers other important areas that aren’t included in the fund’s management fees, like legal fees, auditing, accounting and record-keeping.
Like the rest of us, mutual funds pay taxes that are usually a blend of the current federal and provincial tax rates.
Combined, these three types of fees make up a mutual fund’s MER. Please note that some advisors charge fees for their services directly to the client, in which case the trailing commissions referenced above won’t be included as part of the mutual fund’s MER.
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