It’s important to understand the costs of investing. And when comparing options, it’s equally important to understand the value you receive for what you pay. Let's take a closer look.

The cost of a mutual fund is the MER or Management Expense Ratio.

Let’s take a look at the MER for two different series of a mutual fund – Series F and Series A.

Series F only reflects the cost of the fund itself. It is used in fee-based accounts, where your advisor charges a separate fee for advice and service. The MER for Series F includes the fee paid to the mutual fund company for investment management, the fund’s operating expenses and taxes. Let’s start with the investment management fee. In our example, the management fee is 60 basis points, or 0.60 percent per year.

We’ve used that figure because it’s the fee charged on a typical Canadian equity fund from RBC Global Asset Management. A typical fixed income fund fee would be lower. So, what does the investment management fee cover? It pays for professional investment management and research, risk management and oversight, the service and support for you and your advisor’s firm, and the day-to-day management of the mutual fund company.

Let’s look at the second component of the MER – operating expenses. These are typically in the neighborhood of 10 basis points or 0.10% depending on the fund. Operating expenses include the costs associated with unitholder recordkeeping and other day-to-day expenses such as accounting and fund valuation, custody, audit and legal services, regulatory filing and costs of preparing and distributing annual and semi-annual reports and prospectuses.

The management fee and operating expenses are subject to tax at a rate that is determined by the tax rate in the provinces where the funds’ unitholders live. We’ve estimated 8 basis points in our example as HST is generally between 10-13% So, adding up all the components, the total is 78 basis points, or 0.78% per year. Now let’s look at the MER for Series A.

Series A reflects the cost of the fund AND includes a fee payable to your advisor for advice and service. In this case, the Management fee is made up of an investment management fee – which we already discussed – and a trailing commission. Instead of paying your advisor separately, the trailing commission is collected as part of the management fee and paid to your advisor’s firm by the fund company.

The trailing commission is an ongoing fee paid to your advisor’s firm and the financial advisor who provides ongoing financial advice and service. It is often called the “fee for advice.” So what does the “fee for advice” cover? It can be broken down into three components: The first is Advice: Your financial advisor provides you expert advice on a variety of matters like selecting the right investments to meet your needs as you plan for retirement, seek income or save for life events, building financial plans, tax planning, and monitoring and rebalancing your portfolio to name just a few.

The 2nd component is Access, which covers the infrastructure required by your financial advisor and their firm to support the distribution, sale & servicing of mutual funds. And the third component is Service. Things like trade confirmations, opening and closing accounts, issuing statements and other client communications and regulatory compliance activities.

In our illustration, the trailing commission is one percent, which is a typical percentage for an equity fund. In general, trailing commissions range from 0.5 percent to 1 percent. For an investment of $100,000, a 1% trailing commission would pay your advisor’s firm $1000 for the advice and service they provide you. When you add up the management fee, operating expenses and taxes for Series A, the total is 189 basis points, or 1.89% per year.

Let’s talk about fees and your returns. It’s important to remember when you check how your fund is doing that Performance is reported NET of the MER. That means the fund’s performance is calculated AFTER the MER deducted. So the returns you see are the returns you actually receive. As you’ve learned, there are different fees, depending on whether you own Series F or Series A.

Remember, Series A will have a higher MER because it includes the trailing commission that pays for advice, access and service. Series F is used in fee-based accounts, where any fees for advice, access and service are billed directly by your advisor’s firm.

At RBC Global Asset Management, we offer Series F and Series A. to support the different ways that investors and advisors choose to work together. We hope this introduction to MERs answers most of your questions. If you want to find out more, please see the other resources listed on this page or talk to your advisor.

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