For those entering the world of investment, you've likely seen this term and wondered "What is MER?" This acronym stands for Management Expense Ratio and, put simply, it's the main cost of investing in a mutual fund or ETF.
The MER is typically expressed as a percentage and is made up of several components, including management fees, operating expenses, and taxes. These costs are often directly subtracted from your return.
To help you understand this term and all the work that goes into setting it, you'll want to study the various components that make up the greater fee, know how the fund's series type makes a difference, and understand where to find this information when looking at a mutual fund or ETF.
Here, we'll take a look at all of this information, plus offer some tips on how you can find a good MER and save money.
Key Takeaways
- MER stands for Management Expense Ratio and represents the main costs of investing in a mutual fund or ETF.
- A fund's MER is typically expressed as a percentage and is subtracted from your overall return.
- The components of an MER include management fees, taxes, and various operating expenses.
- A good MER in Canada is under 0.75%.
- You can find a fund's MER mentioned on the fund company's website, within the MRFP, on a Fund Facts document, and/or within the simplified prospectus.
The components of an MER
To fully understand what an MER is and how it works, you'll need to look at the various components held within it. These include management fees, taxes, and various other operating fees.
1. Management fees
The term "Management Fee" is fairly self explanatory – it covers the costs of maintaining your investment portfolio, paid to your fund manager. The services included in this fee can vary depending on which type of series fund you've invested in.
In general, though, you can expect that the management fee will cover these aspects:
- the time and services of a portfolio manager and team of analysts,
- the tools used by the manager and analysts,
- access to infrastructure for your manager and analysts, and
- the regular communications, activities, and services you use and enjoy.
2. Various operating expenses
Maintaining a mutual fund requires the management team to complete a variety of operational tasks and services, and payment for these is also included in the MER.
Here are a few examples of the acts and services covered here:
- accounting,
- fund valuation,
- record-keeping,
- custody,
- filing,
- reports,
- legal elements,
- compliance, and
- auditing.
3. Federal and provincial taxes
Yes, there are taxes charged on the fees you pay for mutual fund administration and management. A combination of provincial and federal taxes are rolled into your MER, based on the province where you live.
Why the series type matters for your MER
While there are several components that make up an MER, the elements involved are different for each series of the same fund. For example, a Series A fund has trailing commission fees while a Series F fund doesn't.
Let's compare the 2 types.
Series A: Transaction-based
Series A mutual funds are generally known as "retail series" and are available to everyone. However, the MERs for funds in this series are higher than those in other series, mostly due to the inclusion of trailing commissions.
A trailing commission is a fee charged by the financial advisor or manager taking care of your investments. You pay this fee as a means of encouraging your manager to review your holdings and offer advice.
This formula shows the makeup of an MER for a Series A mutual fund:
MER = Management Fee (Investment Management + Trailing Commissions) + Operating Expenses + Taxes
In this formula, the Investment Management and Trailing Commissions are added together to form the Management Fee. But other types of Series will have different components for the Management Fee.
Series F: Fee-based
Series F funds are also known as Fee-based Series Funds and are purchased by those with a fee-based arrangement with their investment manager – so you're paying fees instead of a trailing commission.
Here's the formula to show how the MER is determined for a Series F mutual fund:
MER = Management Fee (Investment Management + Operating Expenses) + Taxes
The Management Fee in this case is made up of the Investment Management and Operating Expenses. Keep in mind, though, that anyone with Series F funds is likely paying an account fee to their manager on top of the MER.
Why do you need to consider the MERs?
It's important to consider all costs involved when making investment decisions, and the MER is certainly a cost worth considering. And since they're directly subtracted from your returns, it's easy to forget about them. The last thing any investor wants is for fees to eat away at their profits, so reviewing and monitoring the MER should be a priority.
But profits aside, the MER provides a measure of transparency for you, the investor. Fee-based funds (Series F) are particularly good this way as they disclose the individual costs per component of the overall MER, including the precise fee paid to the manager.
Essentially, the MER breaks things down in a way that allows you to determine the short and long-term impacts on your returns.
Where to look for a fund's MER info
Of course, in order to consider the MER before making an investment, you'll need to know where to find this information. A fund's MER can be found in a few different places, each of which is fairly easy to find or get a copy of:
- on the fund company's website,
- within the most recent Management Report of Fund Performance (MRFP),
- included on a Fund Facts document,
- within the simplified prospectus.
If you're unfamiliar with the term, a simplified prospectus is a legal document that contains details regarding a fund's management fees, trailing commissions, operating expenses, and more.
Other investment costs you may encounter
There are certainly other costs associated with mutual fund investments, as you'd likely expect. These can include:
- account fees,
- currency conversion fees,
- redemption fees,
- trading costs,
- switch fees,
- taxes on capital gains and/or dividends,
- portfolio transaction costs, and
- brokerage commissions.
Any trading expenses incurred by the fund manager are added together and referred to as the Trading Expense Ratio (TER). This can include several of the fees mentioned above as well as others.
There could also be HST charged on the fees mentioned here, so be sure to factor that in when planning your investment budget.
Tips to save on investment fees
While some MERs and the associated investment costs can rack up quite quickly, there are a few ways that you can save. The most obvious way to cut down on these fees is to choose a fund with a good MER, but other ideas include using a commission-free brokerage, not trading in foreign currencies, and investing in ETFs.
Let's take a look at these money-saving strategies in a bit more detail.
Be sure to look for a "good" MER
While the ideal MER is under 0.75%, it's best to avoid anything above 1.5% as this is an especially high MER.
Unfortunately, Canada has historically been known for its super high MERs – some of the highest in the world, actually, going as high as 3%. This isn't the norm, though, so as long as you're vigilant, you can avoid unnecessarily pricey fees like this.
Use a brokerage with commission-free trading
One way to avoid a high MER is to use a discount brokerage – some brokerages don't charge any commissions whatsoever for trading, and most will at least allow you to buy ETFs for free.
Wealthsimple Self-Directed Investing is one of the top online brokers in Canada, in large part due to the lack of commission, withdrawal, inactivity, or maintenance fees. There's also no minimum account balance required, so you can start out as small as you like and work your way up.
You can learn more about Wealthsimple Self-Directed Investing here:
While you may have heard of Wealthsimple, did you know that Wealthsimple also offers Wealthsimple Self-Directed Investing? And it’s a little different. They advertise it as “a simpler way to trade,” and it’s hard to argue with that. You can only open a handful of account types. You can trade stocks, ETFs, options, margin, and corporate products on Canadian and U.S. exchanges. And that’s about it.
- Well designed and easy to use app
- Trade on Canadian and U.S. exchanges
- CIPF protection up to $1,000,000
- No minimum account balance
- Market + 1.5% fee for currency conversion
- There are some fees for particular things
- Focus on simplicity and ease of use
- Search and track stocks with a watchlist
- Personal
- TFSA
- RRSP
- LIRA
- FHSA
- RESP
- RRIF
- Non-registered
- Corporate
- Margin
- Stocks
- ETFs
- Options
- Crypto
- Margin
Invest in ETFs
An ETF requires that you manage your own investment, versus a mutual fund that's professionally managed for you. This is one reason why ETFs typically have lower MERs, some even as low as 0.02%.
Plus, being your own investment manager means you can trade any time you like, as long as the market is open. And using a robo advisor provides the convenience of fund management with the low cost of a discount brokerage. In short: it's another way to save money.
Trade only in your currency
Converting between currencies can rack up some annoying fees, thanks to unfavourable exchange rates, conversion fees, etc. But if you focus on only trading in Canadian dollars (or whatever your home currency may be), you can avoid these annoying costs.
Optimize your taxes
If possible, you should use up all of the contribution room in your registered accounts before investing in taxable accounts. Yes, you'll still have to pay taxes once you withdraw funds from your RRSP and/or RESP, but you won't pay on the capital gains earned while the money is in your account.
$75 GeniusCash + Unlimited transactions for $0 + Ding-free non-affiliated ATM usage.
$25 GeniusCash + $50 bonus for funding a new account, and $0 commissions on stocks & ETFs
$12 GeniusCash + Access trusted news coverage 24/7 + Digital and home subscription options.
$25 GeniusCash + Delicious meal choices with fresh ingredients + Front-door delivery.Has MER had an effect on your investments?
Paying an MER is a requirement for anyone investing in mutual funds or ETFs, and understanding what you're paying and why is one of the most important steps in your investment journey.
How have MERs affected your investment choices? Have we missed any important details in this overview that you feel should be included?
Feel free to let us know by dropping a note in the comments section below.
FAQ
What is MER in investing?
MER stands for Management Expense Ratio and represents the cost of investing in a mutual fund or ETF. It's made up of several different components (various fees and costs) and is expressed as a percentage.
What's a good MER?
A good MER in Canada is anything under 0.75%. It's unlikely that you'll find anything much lower than this, but Canada is known for its high MERs, so be careful of anything over 1.5%.
Is a higher or lower MER better?
A lower MER is better as it will save you money. However, since the MER includes payments to the fund manager, you should make sure your investment is still getting the service and attention it requires.
What's the average MER for a mutual fund?
Canada has historically high MERs that even now can go as high as 3%, with the average hovering between 2.23% and 2.53%. Luckily, diligent investors can find MERs closer to 0.5% and save themselves some money.
How can I save on my MER?
Investors don't really have control over the cost of an MER, but they can choose investments with lower rates. Other ways to save on your investments include using a commission-free brokerage and buying ETFs instead of mutual funds.
Leave a comment
Comments