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How to find your way through the maze of mutual fund fees

by | Oct 14, 2015 | SELF-PUBLISHED

Sorting out MERs, TERs, and loads

If you’re a novice investor, and you’ve been looking at the costs of mutual funds, you’re probably finding it more than just a bit confusing. For example, you might have seen a number of different costs and expenses listed for mutual funds, including front-end load, management expense ratio, and trading expense ratio. Here’s a look at what these are and what the difference is.

You’re not alone in being in the dark about the fees and costs of mutual funds. This has been a long-standing complaint of investors, and the industry and its regulators have been trying to find ways to make fees and costs more transparent for the investor. Some progress is being made, but there’s still a long way to go. In the meantime, it’s best to educate yourself about the basics of fund fees and costs.

A heavy load to carry

First of all, let’s look at the “front-end load.” This is not, strictly speaking, an operating cost charged by the fund itself. Rather, it’s a commission you pay to whoever is selling you the fund. The load is expressed as a percentage, and is taken off the top of the amount you invest. So if there’s a 3% front-end load on a mutual fund, and you have $10,000 to invest, $300 will be deducted from your investment and given to the fund salesperson as a commission, leaving your total investment in the fund at $9,700. “No load” funds are typically sold without any front-end commission to a salesperson, and are favored by do-it-yourself investors who purchase funds directly from fund companies that offer no-load funds.

The expense of management

The “management expense ratio” consists of the fees that the fund pays for various operating costs. The biggest of these is typically the cost of investment management. This compensates managers for researching, trading, and reporting the portfolio. Usually, the more active the fund or the more complex its investment strategy, the higher this fee will be.

Investment funds may also pay commissions, or trailer fees, to financial advisors, brokers, dealers, and fund salespeople for their planning and asset selection services they provide for you, their client.

In addition to the fee paid to the portfolio manager and investment salesperson, the fund must also pay basic operating expenses, such as legal, administrative, and accounting fees. In addition, Harmonized Sales Tax must be paid on all of these items, and this also forms a part of the MER for a fund.

The cost of trading

The “trading expense ratio” (TER) is a more obscure measure, but is likely to command more attention over the next year or so as new fee- and expense-reporting rules start to kick in. The TER is essentially a measure of a fund’s transaction costs expressed as a percentage of the fund’s average asset value over a given reporting period. So, for example, a TER of 0.04% on a fund with average asset value of $500 million over a year, means the fund pays about $200,000 in transaction costs.

The transaction costs include, of course, brokerage commissions that the fund manager pays for trading securities as well as custodian transaction fees. Again, in the case of equity funds, the more active the fund, the higher the TER will be. (Note that in Canada, “TER” refers to “transaction expense ratio,” but in the U.S., it refers to “total expense ratio,” a different measure, and not to be confused with the “TER” used in Canada.)

If you’re still hazy about what all these costs and fees are and how they impact your investment portfolio, speak to a qualified advisor, who will spell out in details exactly what these costs and fees are in relation to your own investments.

© 2015 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited. This article is for information only and is not intended as personal investment or financial advice.

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