You have probably heard of them. They are mentioned frequently in the media — how they are high, how they eat in to your returns — they very rarely get good press. But what are they exactly?
To begin with, MER is not a word. Rather, the letters stand for Management Expense Ratio. Mathematically, it is a measure of the total expenses involved in a mutual fund, which is typically comprised of three things:
• the amount that you pay to the fund company that sponsors your mutual fund;
• the amount that you pay to the advisory firm that you deal with, which includes what your advisor is paid (assuming you deal with an advisor). In the event that you manage your own investments (i.e. online), this fee would be retained by the online broker;
• and finally, the expenses (i.e. trading costs) incurred in the management of a fund.
How high are they? Typically, an MER is measured as the costs to you as a percentage of your investment. An actively managed Canadian mutual fund, for example, would typically have an MER of between two and 2.5 per cent.
Are they worth it? Based on a number of factors it could be argued that some are and some are not.
There are, however, alternatives such as individual securities, ETFs, and REITS that are less expensive and potentially more effective. All of these can be considered when constructing a portfolio. With the right mix, total portfolio costs can be lower than would be the case in a portfolio comprised exclusively of mutual funds.
My advice to investors wishing to control costs is as follows:
• Investors should be mindful of fees, but should also understand that they are necessary.
• Discuss your fee structure with your advisor. Know that there are options. Choose the one that best suits you.
• Consider dealing with an advisor who is fully licensed and is not restricted to mutual funds only.
There are, of course, many other factors to consider: deferred sales charges, commissions, fee-based options, etc. For a frank discussion of what options are available to you, please feel free to call or e-mail.
Jim Grant, CFP, is a financial advisor with Raymond James Ltd (RJL). This article is for information only. Securities are offered through Raymond James Ltd., member Canadian Investment Protection Fund. Insurance and estate planning offered through Raymond James Financial Planning Ltd., not member CIPF. For more information feel free to call Jim at 250-594-1100, or e-mail:jim.grant@raymondjames.ca
