Management Fee versus MER – NOT THE SAME THING!

I thought I would take the opportunity to make today’s post about the difference between MER’s (Management Expense Ratios) and Management Fees.

Too often people will use the two terms interchangeably – and this can be misleading. Generally business journalists and investor advocates will warn you to avoid MERs that are too high – and might site an MER of 2.00% as being the most you would want to pay for a certain type of mutual fund (this is just an example). However, some people will look at the Simplified Prospectus of a fund and note that a fund they might be considering has a Management Fee of 1.50%. They might think to themselves that this is acceptable based on what they have read about fees.

But note that the MER is made of up a number of different types of expenses, only ONE of which is the Management Fee. A fund with a Management Fee of 1.50% may have a MER of higher than 2.00%.

Specifically an MER (Management Expense Ratio) is made up of:

Management fees paid to the mutual fund manager (this is what can be mistaken for the Management Expense Ratio)

PLUS

Fund administration expenses
Advisor sales commissions and ongoing trailer fees
Legal fees
Audit fees
Custodian fees
Transfer agent fees
Marketing and advertising expenses
Goods and services tax (GST)

Let me take an example from an actual Fund Prospectus. I will omit the name of the fund or the fund company, but the numbers are real. I will compare the “Management Fee” with the actual “Fund Expenses Indirectly Borne by Investor”. “Fund Expenses Indirectly Borne by Investors” gives you a better approximation of the actual dollar amount of fees you would pay on every $1,000 invested if the fund earned a 5% return in that year, and the MER was the same as the previous year. This information can be found in all Mutual Fund Prospectuses.

Mutual Fund “X”

Management Fee listed: 1.85%

Fund Expenses Indirectly Borne by Investors: $22.35 per $1,000 (=2.235% MER)

So in this case, some might be under the impression that this fund has an MER of 1.85%, when in actuality it is 2.24% (rounded). Buyer beware!

Related posts:

1. Active Share: Will The Real MER Please Stand Up?
2. Free Investment Management
3. TER: The Trading Expense Ratio or Total Expense Ratio?