Clark Wealth Management Group - ScotiaMcLeod Fredericton

The total cost of ownership of an investment is the sum of, the cost to buy or sell it plus the cost of carrying it. Last time we looked at the 4 types of costs to acquire mutual funds which we referred to as “loads”.

Today we’ll look at the carrying costs of mutual funds – widely known as the MER or management expense ratio. The MER represents the total of all management fees and other expenses charged to the fund, expressed as an annual percentage of the funds’ total assets.

The internal costs of a mutual fund are generally comprised of 4 components. Part goes to pay the managers who make the day to day investment decisions in the fund, part goes to pay trading, securities custody and other operating expenses of the fund, and part of it goes to pay a profit margin to the fund company. In the case of advisor-distributed funds, part of the MER goes to pay a servicing fee to the advisor who sold you the fund and who provides you with ongoing advisory and planning services. The amount paid to the advisors firm is typically between 0.50% and 1.00% for equity funds and usually half of that for bond funds. This might lead you to believe that no load funds sold by the banks would always have lower MERs than some funds that compensate advisors. Not necessarily the case.

A less expensive fund is not always better for investors, but there is a definitely a statistical correlation between better investor results and lower investments costs. There is also evidence that indicates that investors who work with good advisors do better too, but that’s a subject for another day.

Here’s what it could be costing you to own your mutual funds. The median Canadian Equity Mutual fund has an MER of 2.11%, the median Global Equity fund MER is 2.43%, the median Canadian Equity Balanced fund MER is 2.18%, the median Canadian Fixed Income Balanced fund MER is 1.82% and the median Canadian Bond fund MER is 1.21%.

Over the past 5 years or so we’ve seen increased investor interest in another type of investment that shares many of the advantages of mutual funds but has significantly lower carrying costs. These are called exchange traded funds (ETFs). There is rapidly becoming an ETF for any type of investment you can imagine, from simple short term bonds to more exotic commodity related issues.

For many investors, ETFs can be an effective way to reduce overall costs of investment ownership – which “may” improve investor returns. The major Canadian and International core ETFs are available to investors at an MER between 0.17% and about 0.65%. Keep in mind that there are often commissions charged to buy and sell ETFs and many advisors charge a fee in addition to the MER for the services they provide. These costs need to be considered when comparing ETFs to mutual funds.

ETFs are not the “no brainer” they have been billed as by some pundits, so approach them with a healthy amount of scepticism and some professional assistance -- by someone who is licensed to work with ETFs.

Keir Clark, is a senior wealth advisor, with Clark Wealth Management Group and branch manager at ScotiaMcLeod in Fredericton, NB. He can be reached online at www.keirclark.ca or by telephone at 506-450-6465.

Information and opinions contained herein have been compiled from sources believed reliable but no representation or warranty, expressed or implied, is made as to the accuracy or completeness.