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)
This is 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:
The operating costs are things like administration, bookkeeping, compliance, distribution, and marketing the fund, etc. MER does not include trading costs.
What you should see from the graphic above, is that management fee is also the sum of two key parts:
- Investment management fees, and
- Trailing commissions.
A management fee is the amount paid to the fund manager to oversee and make fund decisions.
Also as part of the management fee is the trailing commission (or trailer fee) – a fee for distributing and/or selling the fund. This fee goes from the fund manager to the dealer in exchange for services. When you invest in some mutual funds or other financial products, 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.
Trading Expense Ratio (TER)
This 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).
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 1) management expense ratios (MERs) low and 2) trading costs down.
Those are two of many keys to building financial wealth.
@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.
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.
I hear ya Gary, some consistency across the board would be good for apples-and-apples comparisons.
Thanks for the comment!
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.
That’s quite possible FerdiS, interesting take, thanks for that.
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’.
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.