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Management Expense Ratio Update (MER)
10/31/2014 2:12:14 AM
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Lumsden on Retirement
Burlington, ONT-based Financial Advisor Jack Lumsden offers ideas and financial planning information on retirement issues.



By Jack Lumsden  | Saturday, January 10, 2004


 
The key factor to remember is that the total fees charged by a fund are outlined in each fund's prospectus, and this should be reviewed carefully and understood.

There have been many articles in the press lately about Management Expense Ratios (MERs), and some people may be wondering what exactly is included in the calculation of the MER of a mutual fund. The following is a review of the exact makeup of MERs.

Management expense ratio (MER) - A measure of the total costs of operating a fund as a percentage of average total assets.

This is the cost an investor has for investing in a mutual fund. An MER can normally be divided into two main parts:

1. Management Fee to the Fund Company. Included in the management fee is the trailer (service) fee paid to the dealer/broker.

2. Operating Expenses to manage the fund

When you see the returns of a mutual fund published in a newspaper or on line, normally the returns are after the MER has been deducted within the fund (note: there are some exceptions).

A simplistic example is:

Fund Earnings before expenses 10.0 %
The MER of the Fund 2.50 %
Reported Returns 7.50 %

What makes up the MER of a Mutual Fund?

1. Management Fee

The management fee is the fee that the fund manager charges to manage the money within the fund on behalf of the investors. This is normally a set %, and is deducted on a monthly basis. As an example, the following are some of the Canadian Equity and Fixed Income management fees for popular funds:

Fund Type Management Fees
Ivy Canadian Canadian Equity 2.00%
Trimark Select Growth Canadian Equity 2.00%
AGF Canadian Bond Canadian Bond 1.50%
Trimark Canadian Bond Canadian Bond 1.00%

1.a) Trailer (Service Fees)

From the management fees, the fund company will pay to the advisor's firm an ongoing trailer fee. The amount of this ongoing fee depends on, among other things, the way the fund is initially purchased and the type of fund.

When a mutual fund is purchased from a dealer or broker, it can be purchased one of two basic ways.

Redemption Sales Charge (Deferred Sales Charge):

The first way is on a Redemption Sales Charge (also called Deferred Sales Charge) basis, which means the fund company pays the financial advisor's dealer a fee of up to 5% of the initial purchase price. If the investor invests $10,000 into a fund, then the full $10,000 is invested with nothing deducted. However, if the investor transfers out of the mutual fund family, there is a declining charge based on how long the fund was owned. A typical time frame for a mutual fund is to have a 7-year declining sales charge. Some fund companies have introduced low load options with a 3-year declining sales charge schedule. You have to examine the prospectus for each fund for the specific details.

Front End Load (or no load):

The second way to purchase a fund is the use of a front-end load. With a front-end load fund, the advisor may charge anywhere from 0-5% of the initial purchase price of the initial investment. If a fee is charged, it is deducted from the purchase price. With this type of purchase, there would be no cost to sell the fund in the future.

The service fee paid to the advisor firm is based on the initial purchase option. Those funds that are purchased on a front-end load or no-load basis usually pay a higher trailer fee. As an example of the above funds:

Fund Type Service Fee if Purchased Front End Service Fee if Purchased Redemption Sales Charge
Ivy Canadian Canadian Equity 1.00 % 0.50 %
Trimark Select Growth Canadian Equity 1.00 % 0.50 %
AGF Canadian Bond Canadian Bond 0.50 % 0.25 %
Trimark Canadian Bond Canadian Bond 0.50 % 0.25%
It should be remembered that the trailer or service fee is normally included in the management fee of the mutual fund. The exact specifications for each mutual fund is outlined its individual prospectus. The trailer fee or service fee is normally paid to the advisor's dealer or broker on a monthly or quarterly basis.

2. Operating Expenses

Another component of the expenses that the fund will deduct is the operating expenses of the fund. This can include:

  • Brokerage commissions and fees
  • Taxes, including GST, income and foreign withholding taxes
  • Transfer agency fees
  • Accounting, audit and legal fees and expenses
  • Interest expenses
  • Safekeeping and custodial fees
  • Investor servicing costs for call centers, annual and semi-annual reports, prospectuses and other reports.

The operating expenses are the actual costs and this means that the MER can change from one year to the next.

3. Total Management Expense Ratios

What you see reported in the media is the total MER of the funds and it can be divided into expenses and management fees as follows:

MER = Operating expenses and Management fees

As an example:

Fund Type MER Total Expenses Management Fees
Ivy Canadian Canadian Equity 2.51% 0.51% 2.00%
Trimark Select Growth Canadian Equity 2.38% 0.38% 2.00%
AGF Canadian Bond Canadian Bond 1.99% 0.49% 1.50%
Trimark Canadian Bond Canadian Bond 1.25% 0.25% 1.00%

The management fee is outlined in the prospectus and cannot be changed without approval by the unit holders, however, the operating expenses are based on the actual costs so the MER is not fixed and will vary as the expenses vary.

Summary:

The key factor to remember is that the total fees charged by a fund are outlined in each fund's prospectus, and this should be reviewed carefully and understood. If you are using an advisor, he/she is paid from the ongoing service fee, so you should expect a certain level of service from them.

If you have any further questions, contact Jack Lumsden, Financial Advisor, Assante Financial Management Ltd, 100 - 4145 North Service Road, Burlington, ON L7L 6A3 Phone: (905) 335-2598 or email: jlumsden@assante.com

Jack Lumsden is a Financial Advisor with Assante Financial Management Ltd. Please contact a professional advisor to discuss your particular circumstances prior to acting on the information above. The opinions expressed are those of the author and not necessarily those of Assante Financial Management Ltd. Commissions, trailing commissions, management fees and expenses, may all be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Please read the prospectus and consult your Assante Advisor before investing.

 
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