Investment Fees - Understanding the MER

The Management Expense Ratio (MER) reflects a mutual fund’s total charges, including management and administrative costs.

It’s expressed as a percentage of the fund’s value.

MERs are also like taxes. They take your money regardless of performance, and the cost compounds to result in a long-term significant drag on performance.

Consider an alternative - ETFs.  Many ETFs and mutual funds are near copies other than the fees.  ETFs almost always have much lower fees.  If your advisor is recommending mutual funds, ask: Why?  Why not an ETF?  What is the difference in the advisor's compensation between the mutual fund they recommend and a similar ETF?

Remember, MER indirectly impacts your returns—consider it alongside services received.

Trailing Commissions Explained

Trailing commissions are cleverly tucked into a mutual fund’s MER.

Here’s the deal:

• Paid by the mutual fund company to your adviser’s firm annually.
• Stays active as long as you remain invested in the fund.
• Typically ranges from 0.25% to 1%.
• Different fund companies offer varying trailing commissions.

Warning: These commissions can sway an adviser’s investment recommendations!

Front-End Load or Sales Charges

Ever heard of a front-end load? It’s like a one-time entry fee for mutual funds.

Example: Invest $1,000 with a 1.5% front-end fee—your adviser’s firm pockets $15, and $985 goes into the fund.

Many investors don’t like paying up front. It’s sticker shock. So many advisors recommend the trailing commissions also known as Deferred Sales Charges (DSC). DSC will cost you more, but they sell better. Which do you prefer, to pay less or to think you are paying less because you pay in dribs and drabs?

If no front-end load, ask about other charges (like the MER). One way or another, there is only one person paying for your advisor – you.

Back-End Load or Deferred Sales Charge (DSC)

DSCs play the long game:

• Paid when you sell mutual fund securities within a specified period (usually 5-7 years).
• The longer you hold, the lower the charge.
• No upfront cost, but selling early means paying more.

This type of fee can be a hazard. Rarely is this type of fee in your best interest (I can’t think of any time that it is the better option).

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Low Load Funds Demystified

Low load funds offer a win-win:

• Lower sales charge at purchase or redemption (usually around 3%). Still a high fee, as compared to the better performance of an Exchange Traded Fund.
• Bonus: No redemption fee if you hold the fund for at least three years.

No Load Funds: The No-Fee Attraction

No load funds skip the upfront fee drama.

But wait! Before you dive in:

• Evaluate the MER (Management Expense Ratio).
• Assess risk and historical performance.

Choose wisely—your financial future depends on it!

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