What is an MER?

There’s a lot of talk in the media about investment-related fees, and particularly MERs.

It may be a little overwhelming — here’s what you need to know.

A MER is the combined expenses of the fund management fee, advisor fee, taxes, and daily operating fees (things like audits and record keeping). Hence the term Management Expense Ratio.

Here’s how IFIC and Investor Economics break it down:

• Fund Manager Fee: 92 bps
  • Costs incurred by the fund company, including investment research, portfolio management, marketing and profit.
• Dealer/Advisor Fee: 78 bps
  • Annual dealer/advisor compensation fees (trailers), for funds sold through the advisor channel. (In some cases, these can be negotiated.)
• Operating/Administrative expenses: 19 bps
  • Includes regulatory expenses, client service costs, transaction processing, custody, audit and legal fees, financial statements and document management.
• Taxes: 19 bps

Dennis Tew, head of sales compliance and business operations at Franklin Templeton Investments in Toronto, says the two biggest administrative costs are:

• Transfer agency fees: Keeping track of who holds the fund, sending out statements, tax and RRSP slips, etc.
• Fund accounting: Pricing securities and the fund, sending the data to newspapers and data providers, etc.

He adds tax pushes Canadian prices well above those in the U.S. and Europe. The Canadian version of one fund he was setting the price for had to be 13% higher than the U.S. and European versions, due solely to Ontario’s HST.

Why MERs are often worth the cost

As with TERs, be sure you’re comparing apples to apples with MERs, Rountes says.

“A balanced fund with a fixed-income component typically has a lower MER than a pure equity fund. Generally, domestic equity funds should have lower MERs than foreign equity funds or even sector funds such as resource funds.” (Sector funds typically require managers to spend more time researching the differences between companies.)

Higher MERs can sometimes be worth it, he adds. “If a manager is shooting the lights out in the first quartile and charging 10 or 15 basis points more in MER, you can make an argument that it’s justifiable — the return dictates it. But if the manager’s in the fourth quartile and the MER is higher, that may be a warning flag.”

JP Burlock, portfolio manager at 3Macs in London, Ont., says some of his clients have a mix of mutual funds, ETFs and individual securities. Given the fee difference between ETFs and mutual funds, clients want to know why he doesn’t just use ETFs.

“If we get into a bear market for a prolonged period, where stock market indices are dropping by 50%, your [index-tracking] ETF will, by definition, [fall by the same amount]. If you have high-quality, active mutual funds, [managers] are able to deviate from the index, and [as a result] won’t do so poorly.

“So, often in bear markets you don’t want ETF exposure. I don’t know when those bear markets are coming, so a blend of active and passive is often appropriate.”

His message: part of the MER is to pay for expertise that allows for less severe losses during major downturns.

Burlock isn’t deterred by high-MER funds. All that matters, he says, is long-term net-of-fees performance.

One fund he’s put many clients in has an MER of 2.64%. “That’s on the high side,” he says, but he likes it because it has low volatility and a net yield of 7.5%. “For clients who need to live off yield from a medium-risk portfolio, it’s a fabulous fund, even though it costs a bit more.”