MER TER Money Management Fees FWIW

A few months ago I got an email from a reader stating something to this effect:

Hello again, here is something you probably already know, the management fees recorded on most Exchange Traded Fund (ETF) sites is NOT the same as the MER, in some cases, not by some lot. I own shares with most of the providers, but do feel the industry should be OBLIGED to report the total MER and not just the management fee.  To cite some examples, XEI by Blackrock has the 0.20% management fee posted on their website whereas Morningstar reports the XEI management expense fee as 0.61%. The Vanguard funds and site seems clearer to investors.  For example, Vanguard Canada reports both management fee and management expense ratios for their ETFs.  On some sites I find it is almost impossible to find what the products actually charge investors. Perhaps you could do a story on this?  I think the MER is key, thanks!

Thanks to this reader for raising this issue with me.  I agree; more transparency but also more consistency is needed when it comes to financial product reporting.  For what it’s worth (FWIW) here’s a primer about management fees versus trading expense fees versus management expense ratios and more.

Management Expense Ratio (MER) – the combined total of the management fee + operating expenses + taxes charged to a fund during a given year expressed as a percentage of a fund’s average net assets for that year.   Thanks to this RBC article it looks like this:

MER

The returns you earn as an investor – whether reported on your statement or in promotional materials – reflect product performance data after the fund’s MER has been deducted.  As an investor you probably want to invest in products with a low to modest MER.

Trading Expense Ratio (TER) is a measure of a fund’s trading costs.  So, higher TER equals more active trading and management.   As an investor, you probably want to invest in products with low turnover rates.  TER is independent of a fund’s MER (management expense ratio).

When you invest in mutual funds or other financial products, there could also be sales commissions charged to an investor.  Products may include no-load (no commissions paid), front-end load (commissions paid upon fund purchase) or back-end load (commissions paid upon fund redemption) fees.  There could also be deferred sales charges (the most common type of back-end load) where the redemption fee rate diminishes over a few years time.

All is to say, when it comes to investing, I firmly believe fees (certainly high-priced fees and multiple types of fees charged for each product) kill portfolios. Until financial reporting is made more transparent not to mention more consistent across the board be very mindful of the financial product fees at the beginning, during and at the end of the product’s lifecycle.

Do what you can to keep your management expense ratios low and trading costs down – those are two of many keys to building financial wealth.

13 Responses to "MER TER Money Management Fees FWIW"

  1. The expenses are then added up to get a total, then divided by 12 and subtracted from your account monthly, you never notice this small amount. Your total return will always be what you make after fees and applicable taxes if any. That’s why as Mark stated, costs matter so keep them as low as possible.
    Discosure: I own shares in XEI

    Reply
    1. Thanks Peter. I think XEI is a good income product for investors, especially those that have no incentive to buy and hold stocks directly. I’m going a bit different route, trying to buy and hold many of the stocks XEI holds directly. I hope to have about 30-40 in my portfolio at some point.

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  2. If fund A is offered with two different MER’s, the lowest MER is better.

    However what seems to be asserted here is that if Fund A has lower MER’s than Fund B, then Fund A is better, that MER’s should impact your decision to choose Funds.

    I’m suspicious that this is actually unproven and only assumed to be true because ‘it makes sense’.

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    1. I think with all things being equal (things rarely are), the lower MER the better. I would agree, Fund A, lower MER than Fund B, it is/should be part of the investors decision among other elements.

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  3. I’m all for transparency (and consistency) in stating management fees. I often wonder if the fund manager is sufficiently incentivized by management fees (and their potential loss if performance is subpar) to truly represent the best interest of investors. Perhaps a performance component (positive and negative) would lead to improved representation.

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  4. i have been looking at XEI for a while now. the .20 fee looked very attractive but .61 is not. i think maybe i’ll stick to individual entities. i think blackrock and everyone else should be required to disclose their MER not some portion of the total fee.

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  5. @Gary, Stock picking is lower cost because ETF’s might cost 35-40 basis points on average for a basket of stocks, in the case of XEI .61. Where individual stocks cost nothing. However, you might need 35 or 40 stocks and still not have the diversification as an ETF. Also, there is the cost of transactions for buying and selling stocks. There is also more risk with individual equities, something worth keeping in mind. Simple balanced and diversified – there’s a price to pay for that

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    1. Agreed, there is a price to be paid for more active management with XEI, hence the 0.61% MER. That said, it’s still a decent product, much better than most big bank dividend mutual funds.

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  6. May I quote a video clip I recall from someone I admire for his frankness , Jon Chevreau, “the two greatest impediments to wealth in Canada are taxes and fees”

    We can do a certain amount about the first but like death they are inevitable!
    The easy one to fix, fees, is the most ignored . 99% of people don’t know what they are paying.

    Kathy…fee for service planner. Regina. SK

    Reply
  7. @Kathy, investments are a matter of opinion. Taxes are a matter of fact however by using corporate class and institutional funds our clients can write off there advisor fees. So something can be done about taxes with respect to investment MERS.

    Reply

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