Today we’re going to talk about fees. Let’s begin this segment by stating; regardless of the type of investment you make, whether it’s in a GIC or a mutual fund, you are paying fees. In the case of a GIC, the interest rate you receive is net of the fees you are paying. When you purchase a mutual fund the advisor you work with must tell you how much you are paying for fund administration, sales, and other fees. This information is disclosed on the Fund Factsheet. Investment fees do add up and will affect your savings, so it’s important to pay attention and understand these costs and investment advisors must tell you this information.
Fund Administration Fees
So what are fund administration fees and why are they important to you as an investor? When you invest in a fund you are buying the expertise of professionals who will select and manage the investment funds, and in return, you will indirectly pay the fee for this service. The administration fee encompasses all direct expenses incurred in managing the investments such as: hiring a portfolio manager, asset mix optimization, and risk administration. A fund also incurs operating fees which include: marketing costs, record-keeping, custodial fees, legal fees, auditing and other administrative costs. While these fees are not directly involved in making the investment decisions, they are required to ensure the fund is run correctly.
Administration Expense ratio
Together, the administration fees and operating fees make up the Administration Expense ratio or MER. The MER is a broad measure of how expensive the fund is to the investor. They are paid by the fund and are expressed as an annual percentage of the average net asset value of the fund. In general, index and money market funds charge the lowest administration fees because they require little research or active administration, while equity funds and particularly foreign equity funds will charge the highest.
Managers of equity funds must continuously monitor their investments, and managers of foreign equity funds generally require more research in analyzing stock and the markets they want to invest in if you are comparing the MER of different funds, it’s important to make sure that you’re comparing the same type of fund.
A small difference in the MER can make a big difference over time. For example, if you make a deposit of $5,000 into a fund that earns a gross return of 9% a year, compounded annually, and has an MER of 1%, at the end of 30 years you’ll have a fund worth $50,313 if the MER is 2%, your fund will only be worth $38,061 – a difference of over $12,252. Having a clear understanding of the fees charged by a fund is a significant component to making an informed investment decision. Keeping this cost down is one of the secrets to building wealth over the long run.