As your 2019 investment statements start to trickle in you may notice it includes a breakdown of fees paid to your investment dealer.  This regulatory requirement came in to affect a few years ago whereas Mutual Fund companies and dealers are now required to include the fees on your annual statements.

If you are a client of mine you know I am an advocate for explaining the fees and how I get paid, but there is still a lot of talk out there about MERs and investment related fees.  It can be a bit overwhelming; but here is what you need to know.

An MER (Management Expense Ratio) is the combined expenses of the fund management fee, the daily operating expenses which include things like audits and record keeping, the advisor compensation and of course taxes.

The Break Down of a 2.18% MER

Fund Manager Fee:  .92 bps (basis points)

This covers the costs incurred by the fund companies to conduct investment research, manage the portfolio of stocks and bonds, currency management, sector exposure, risk management and on-going monitoring and portfolio rebalancing.

Operating/Administrative Expenses: .19 bps

These expenses include client servicing, transaction processing, regulatory expenses, custody, audit and legal fees, financial statements and document management.

Dealer Compensation:  .39 bps

Annual amount sent to the dealer for funds sold through advisors. These cover the dealer expenses including account openings, transaction processing, production, printing and mailing of account statements, regulatory compliance and office expenses.

Advisor Compensation:  .49 bps

An annual amount paid to the dealer which is passed onto advisor; this covers financial planning expertise for retirement planning and other lifestyle goals, investment recommendations, portfolio construction, ongoing monitoring and rebalancing, tax efficient strategies and estate planning strategies.

Taxes:  .19 bps

Namely the HST (in Ontario), this is the main reason many Canadian investment funds are more expensive than their U.S. and European counterparts. Investment funds sold in Ontario are 13% more expensive than the same version of the funds sold elsewhere, due solely to Ontario’s HST.

Why MERs Vary

When comparing MERs, make sure you are comparing apples to apples, Fixed Income Funds like Balanced and Bond funds typically have a lower MER than a pure Equity Fund.  Generally speaking a Canadian Equity Fund should have a lower MER than a Foreign Fund or a Sector Fund.  An Equity fund manager usually has to spend more time researching different companies and determining which best suites the investment objectives of his/her fund.

No one likes to pay fees; but having someone manage your money does adds value.  I strive to find managers that lower volatility while consistently outperforming the market, even after the fees have been deducted.  Furthermore, if the markets drop by 50% having an active fund manager quickly adjust your portfolio to mitigate the losses is totally worth it.

No matter where you hold your investment account (bank, insurance company, stockbroker or investment dealer) there are always fees.  If they have not been explained to you and/or listed on your statement, make sure to inquire what they are and how you are paying for them.

If you have any questions, please don’t hesitate to call.

Have a great weekend,

Tracey

Source:  Original article posted on Advisor.ca 02-27-15 by Dean DiSpalatro and TD Asset Management, MT2017 Image courtesy of digitalart at FreeDigitalPhotos.net