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Management fee vs. MER: what’s the difference?

December 16, 2019

Written by Tangerine

Key takeaways

  • A mutual fund's management fee is essentially the administrative cost of running the fund.
  • A trailing commission is the fee that the fund company pays to the dealer for selling the fund.
  • The MER is the cost of both the management fee and its trailing commission.

Management fee vs. MER: what’s the difference?

One of the most confusing aspects of investing in mutual funds is understanding their fee structure and how those fees affect your returns.

If you look at a fund company's website or their fund documents, you'll likely see a number of different fees noted, and it's important to understand what each one means. We'll look at the most important ones below.

Management fee 

A fund's management fee is essentially the administrative cost of running the fund. This fee is paid (indirectly) by the investor. This fee is less important than the other fee you'll likely see and should really pay attention to.

Management Expense Ratio 

A fund's Management Expense Ratio (MER) is the cost of both the administration of the fund (management fee) and its distribution (trailing commission paid to the dealer/advisor selling the fund).

If a fund's MER is 2.00%, a common breakdown would be:

  • Management fee: 1.00%
  • Trailer fee: 1.00%

What's a trailing commission? 

A trailing commission (or trailer fee) is the fee that the fund company pays to the dealer/advisor for distributing/selling the fund. A trailing commission is paid by the fund manager to the dealer for the cost of services provided by the dealer and its advisors to unitholders. (Examples of services: investment advice, tax reporting, account statements, trade reporting, online mutual fund platform, contact centre mutual fund platform, account management, etc.)

In general, you don't buy mutual funds from the fund company itself. You buy mutual funds from an advisor who works for a mutual fund dealer. The fund company pays that advisor for selling their fund.

How do fees impact my returns? 

Directly! Here's a simple example:

Fund X  has an MER of 2%, and Fund Y has an MER of 1%

Annual return before fees: 10%

  • Fund X's return to the investor =  8% (10% - 2%)
  • Fund Y's return to the investor =  9% (10% - 1%)

Remember – it works the other way too:

Annual return before fees: -10%

  • Fund X's return to the investor = -12% (-10% - 2%)
  • Fund Y's return to the investor = -11% (-10% - 1%)

Takeaway: Higher MER generally reduces returns and lower MER generally increases returns.

What can I do? 

Before you buy an investment, make sure you understand the total cost of the investment. All things being equal, with investing you get what you don't pay for. Higher fees generally result in lower returns. A difference of 1.00% in fees over a 30-year investing time horizon can literally mean the difference between retiring a year or two earlier or not.

 

This article or video (the “Content”), as applicable, is provided for information purposes only. It is not to be relied upon as financial, tax or investment advice or guarantees about the future, nor should it be considered a recommendation to buy or sell. Information contained in this content, including information relating to interest rates, market conditions, tax rules, and other investment factors are subject to change without notice and Tangerine Bank is not responsible to update this information. References to any third party product or service, opinion or statement, or the use of any trade, firm or corporation name does not constitute endorsement, recommendation, or approval by Tangerine Bank of any of the products, services or opinions of the third party. All third party sources are believed to be accurate and reliable as of the date of publication and Tangerine Bank does not guarantee its accuracy or reliability. Readers should consult their own professional advisor for specific financial, investment and/or tax advice tailored to their needs to ensure that individual circumstances are considered properly and action is taken based on the latest available information.

Tangerine Investment Funds are managed by 1832 Asset Management L.P. Tangerine Investment Funds Limited is the principal distributor of Tangerine Investment Funds. Tangerine Investment Funds Limited and 1832 Asset Management L.P. are wholly owned subsidiaries of The Bank of Nova Scotia. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.