How to understand fund fees
Mutual funds and exchange-traded funds (ETFs) make up the core of many Canadians’ investment portfolios, with options that cover various asset classes and risk tolerance. These products have fees attached, which investment firms charge to cover costs associated with account administration, managing the products’ portfolio, and executing transactions.
Under new total cost reporting (TCR) rules that will begin phasing in next year and will show up on annual statements starting in early 2027, clients will see a more comprehensive view of the fees they pay for investment services, including their fund management costs presented in a dollar amount.
These costs can vary depending on the type of investment, and it’s important to understand the various individual fees involved.
Fund expense ratio and its components
The main components of costs for the majority of funds are the management expense ratio (MER) and the trading expense ratio (TER). Combining these components gives us the fund expense ratio (FER). While most investors are familiar with the MER, the more comprehensive FER will be presented on the annual report on charges and other compensation for each fund owned by the client.
The MER covers the costs of managing and administering the fund and can include a commission to the advisor who sold the fund. It’s made up of several elements and it’s deducted from the fund’s net assets prior to the calculation of the fund’s performance, meaning reported returns include the impact of the MER.
TER comprises the annual trading costs of a fund. The TER is also deducted from returns.
Both the MER and TER are calculated as a percentage of the fund’s total assets, and they’re charged whether or not the fund gains or loses value.
Breaking down the MER
The MER constitutes the bulk of fund costs and includes management fees, operating expenses, and taxes.
1. Investment management fees
- These fees compensate the fund manager for tasks such as investment research, making investment decisions, supervising the fund, and ensuring the portfolio is aligned with the fund's objectives.
2. Trailing commissions (or trailer fees)
- Trailing commissions are ongoing payments made to financial advisors for the ongoing service and advice they provide to clients. These are typically a fixed percentage of the fund’s assets.
- However, for advisors on fee-based platforms, the investment fund manager doesn’t pay a trailing commission. Instead, the advisor’s firm charges a fee to the investor directly for service and advice.
3. Operating expenses
- These expenses cover the day-to-day costs of running the fund. This includes administrative services, fees paid to the regulators, recordkeeping, customer service, legal and audit fees, and regulatory compliance.
4. Taxes
- These are typically sales taxes applicable to the fees charged by the fund.
The MER is automatically deducted from the fund's assets. This means investors pay the MER through a reduction in return, rather than as a separate fee. For example, if a fund has a gross return of 8% and an MER of 2%, the net return for investors would be 6%.
The MER is typically accounted and accrued for daily and paid monthly, which means its impact is spread over time rather than being charged as a lump sum.
Understanding the TER
The TER represents the costs incurred for buying and selling stocks in each fund’s portfolio. Generally, the more actively a fund manager trades within the fund, the higher the TER. Ordinarily, TERs only apply to stock trades, meaning balanced funds tend to have lower TERs than pure equity funds. Fixed-income funds usually don’t have a TER as the commissions are already embedded in the price of the bonds.
The TER is calculated by the sum of the fund’s annual trading costs divided by the fund’s total assets. Like the MER, it’s deducted from the fund’s net assets.
Where to find fund cost information
Clients can find this information in the fund's prospectus and fund facts document, which should be available on the fund company’s website. These documents provide a detailed breakdown of the fund’s fees and are essential for understanding the costs associated with any investment fund.
Important disclosure
Important disclosure
This communication is published by Manulife Investment Management. Any commentaries and information contained in this communication are provided as a general source of information only and should not be considered personal investment, tax, accounting or legal advice and should not be relied upon in that regard. Professional advisors should be consulted prior to acting based on the information contained in this communication to ensure that any action taken with respect to this information is appropriate to their specific situation. Facts and data provided by Manulife Investment Management and other sources are believed to be reliable as at the date of publication.
Certain statements contained in this communication are based, in whole or in part, on information provided by third parties and Manulife Investment Management has taken reasonable steps to ensure their accuracy but can’t be held liable for such information being inaccurate. Market conditions may change which may impact the information contained in this document.
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