Written by Joe Snyder
Monday, December 16th, 2019
What's the difference between a fund's management fee and its Management Expense Ratio?
Good question! 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.
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.
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This article is intended to provide general information only about investment fees. If you need further information about your specific circumstances, you should speak to an investment advisor.