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 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)
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).
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 1) management expense ratios low and 2) trading costs down. Those are two of many keys to building financial wealth.