At What Cost? Management Expense Ratios Explained

Due to the high level of execution practiced by advisors like us, it is often assumed that the cost associated with investing in mutual funds is too high for the average investor. The fact of the matter is that if you’re currently holding a TFSA or RRSP with your bank, the costs of investing with our team will likely be lower.

A Management Expense Ratio (or MER) represents the costs associated with owning a mutual fund. This indicates how much a fund pays in management fees and operating expenses (including taxes) on an annual basis. MERs are expressed as a percentage of daily average net assets during the year.

What are you paying for? Good question.


The ongoing management and maintenance of a mutual fund comes with costs. The costs can be broken down into 4 categories:

  1. Sales Tax

    • Taxes such as HST/GST

  2. Operating Expenses

    • Fund valuation & custodial

    • Audit & legal

    • Record keeping and tax reporting

  3. Portfolio Management

    • Asset mix optimization

    • Investment selection by top money management teams

    • Risk management (ongoing monitoring of money managers & sector exposure, currency management, portfolio rebalancing)

    • Tax effectiveness (i.e. corporate class)

  4. Financial Planning & Advice (where we come in)

    • Planning (investments, estate, tax, retirement)

    • Matching your goals, risk tolerance, and time horizon with the desired investment portfolio

    • Optimization: allocating assets into RRSP, RESP, TFSA, etc.

    • Reviewing progress with you on an ongoing basis

The average MER for a mutual fund is about 2.54%. These are approximate numbers but let’s break down how that gets distributed:

Operating Expenses - 0.25%

Portfolio Management - 1.00%

Financial Planning & Advice (us) - 1.00%

  • Note that this is generally split between the advisor and the firm

Sales Tax - 0.29%

When you hold your TFSA at a bank, you are not avoiding these costs. They still are subject to the same fees but are bundled in as banking fees and you may not bat an eye at them. We are in control of just under half of the MER for TFSA holdings of any value (or other investments over $100k in value) which means we can make sure our client’s are saving money by switching over.

Studies have shown that households with advisors accumulated 260% more wealth over 15 years than households without. Unlike the financial planners at banks, we are not paid a salary and typically only grow our proceeds by growing yours.

If you have any questions regarding your current investments and want to make sure you’re making the most out of your savings, contact us today.

costs.jpg
 
Kevin Ramberran