# Getting a handle on fund fees



## martok (Jun 1, 2009)

Hi,
Ok, I have what I believe to be a newbie fund fee question. Is the management included in a fund's MER or is it another added fee. IE, is the total annual fee mer+management fee? I always thought the MER was tht bottom line but then when looking at the CIBC int'l index fund:
http://www.globefund.com/servlet/Pa...q&id=50349&gf_uid=globeandmail.gf.04049983724

It shows the mer as 1.01% but the management fee of 2.00%. How can this be?


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## Robillard (Apr 11, 2009)

I'm not sure if I can exactly answer your question, but I think the specified management fee rate may be a maximum that the management company is allowed to charge the fund. The specifics of the management fees actually paid by a fund will be in the prospectus. For various reasons, the management company may choose to charge less than the specified management fee. The MER is the ratio of actual management expenses incurred to the value of the assets of the fund, whereas the specified management fee is the theoretical charge from the management company. The MER also includes the effects of the trailer fees that are paid to the mutual fund dealer. This is why in many cases the MER is higher than the specified management fee.

There is a backgrounder on MERs on the Investment Funds Institute of Canada website at https://www.ific.ca/Content/Content.aspx?id=1436 . 

In addition to management fees, investors should be wary of high trading expense ratios (TERs). Trading expenses are incurred if a fund has to make frequent securities purchases and sales.


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## Rickson9 (Apr 9, 2009)

Robillard said:


> There is a backgrounder on MERs on the Investment Funds Institute of Canada website at https://www.ific.ca/Content/Content.aspx?id=1436 .


Cool link. Thanks!


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## leslie (May 25, 2009)

To say the same thing another way:
* Trading expenses are NOT included in the MER. You can see their relative importance from the 'income statement' of the fund.
* Mgmt fees ARE included in the MER. I cannot explain why it does not appear to be in this case. The possible explanation above sounds reasonable to me.


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## OntFA (May 19, 2009)

martok said:


> Hi,
> Ok, I have what I believe to be a newbie fund fee question. Is the management included in a fund's MER or is it another added fee. IE, is the total annual fee mer+management fee? I always thought the MER was tht bottom line but then when looking at the CIBC int'l index fund:
> http://www.globefund.com/servlet/Pa...q&id=50349&gf_uid=globeandmail.gf.04049983724
> 
> It shows the mer as 1.01% but the management fee of 2.00%. How can this be?


Stated more simply, the MER = management fees + operating expenses (legal, accounting, admin, etc.) + GST (and soon to be HST). In the case of the fund you linked above, CIBC International Index, CIBC has the ability to charge up to 2% per year, meaning anywhere from zero to 2%. Clearly they do not charge that much. They're probably charging 0.8% or something with the rest made up of operating expenses and taxes. This is a rare example where the stated management fees is more than the MER.

Others have mentioned the TER or trading expense ratio. This is simply the brokerage fees to buy and sell investments as a percentage of assets. You can add both MER and TER to get an all-in ownership cost (though TER will fluctuate yearly).


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## Jon Chevreau (Apr 4, 2009)

My blog today touches on this in the context of a column I wrote in the Post today about the huge (10-fold? 3-fold?) disparity between Canada's mutual fund MERs and those of cost-leader Vanguard:

http://network.nationalpost.com/np/blogs/wealthyboomer/archive/2009/10/09/a-new-tax-on-savings.aspx


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## OntFA (May 19, 2009)

Jon Chevreau said:


> My blog today touches on this in the context of a column I wrote in the Post today about the huge (10-fold? 3-fold?) disparity between Canada's mutual fund MERs and those of cost-leader Vanguard:
> 
> http://network.nationalpost.com/np/blogs/wealthyboomer/archive/2009/10/09/a-new-tax-on-savings.aspx


Let me get this straight. You're comparing one of the cheapest index funds in the world (which isn't available here) with your impression of what average fees are in Canada? Are you kidding me?

Mr. Chevreau, that's like holding out Barry Sanders in and claiming that the the mid-1990s Detroit Lions were a superior team to the average player on the Dallas Cowboys. It is completely without meaning.

First of all, the average MER would be closer to 2%, not 2.5% if you weight each fund's MER by assets. Is 2% high? Yes it is. But I think you start with an accurate fee and then judge it in the context of what the investor is looking for - eg. advice or no advice, one decision fund or more custom mix, etc.

Second, none of my clients buy "the average fund" so I don't know how useful it is to talk about that in comparison to some other specific individual fund, and one that can't be bought by any body in Canada.

Third, if you're going to choose the largest and cheapest domestic index fund in the U.S., wouldn't the natural cross-border comparison be the cheapest domestic index fund in Canada?

I just don't know what you're trying to say, short of finding some excuse to make the baseless statement that Canada has the highest average fund MERs. Seems to me based on what I've read that there was a lot of doubt cast on this statement but it doesn't seem to stop you from stating it as if it was a fact.

It is commentary like this that puts you in the group of unloved media personalities among advisors. There are great ones like Derek DeCloet, Jim Daw and sometimes Rob Carrick. And at times, Mr. Chevreau, you write some really interesting an insightful pieces. But when you do these sorts of comparisons, you completely lose me and a lot of other advisors.


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## Jon Chevreau (Apr 4, 2009)

The article does say Vanguard index mutual funds are not available in Canada BUT that its ETFs are. Any brokerage customer can buy Vanguard ETFs on American exchanges. 

And I COULD have used the 0.07% MER of the Vanguard Total Market ETF as the ultra-low example but didn't: Just used the average 0.20% they gave out yesterday. The end of the blog provides all the context you seem to be demanding here: see comments by Preet and by Duncan Stewart. 

As for the Tufano study, I wouldn't say its findings that Canadian MERs are higher than most other developed countries have been refuted at all. Some have assailed the methodology and the conclusions but directionally they appear to be in the ballpark, certainly relative to the U.S.


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## OntFA (May 19, 2009)

Jon Chevreau said:


> The article does say Vanguard index mutual funds are not available in Canada BUT that its ETFs are. Any brokerage customer can buy Vanguard ETFs on American exchanges.
> 
> And I COULD have used the 0.07% MER of the Vanguard Total Market ETF as the ultra-low example but didn't: Just used the average 0.20% they gave out yesterday.


Stating that the fund isn't available and then comparing it anyway still doesn't make any sense. You're right that their ETFs are available to anyone with a brokerage account. But then what is the big deal: if you can buy them then that should effectively be counted as one of the cheap funds available to Canadians. But I'd bet it's not in the "official average" now is it?

Minor point: VTI's MER crept up to 0.09% I believe. But what's a couple of basis points between investors?



Jon Chevreau said:


> The end of the blog provides all the context you seem to be demanding here: see comments by Preet and by Duncan Stewart.


Maybe I'm a tool (I admit it at least) but I'm not sure their comments really touch on what irks me about this article. Duncan does talk about risk adjusted performance, which I think is useful. But the notion that you should compare to F series doesn't make much sense either. Nobody can buy F series funds but you can buy VTI or iShares so that doesn't seem to make sense to compare against something that you can't buy. (See, I'm not just a Chevreau basher.)

Same applies to Preet's comments to a degree. Whether you should add 12b-1 fees depends on what kind of investor you are. If you're the smarter DIY types that hang out in forums like this and the Financial Webring then you probably should NOT add any trailer fee for comparison becaues you're likely to avoid trailers altogether.

You would compare against F series or add trailers for an academic exercise comparing fees and investigating sources of fee differences. Or if you're an investor who would seek the services of an advisor you might do that. But for DIY investors, you'd compare U.S. ETFs with Canadian ETFs and index funds - NOT with the AVERAGE ACTIVE FUND.



Jon Chevreau said:


> As for the Tufano study, I wouldn't say its findings that Canadian MERs are higher than most other developed countries have been refuted at all. Some have assailed the methodology and the conclusions but directionally they appear to be in the ballpark, certainly relative to the U.S.


Then, with all due respect, you haven't been reading critiques with much objectivity. Perhaps his study supports the axe you apparently like to grind but it's not sound. That little part above that I wrote about an academic exercise aimed at teasing out the source of differences between two markets, eg U.S. vs Cda, does not appear to have been done in Tufano et al.

But let's forget about that for a minute Mr. Chevreau. I want to re-emphasize something you said.



Jon Chevreau said:


> Some have assailed the methodology [of Tufano et al] and the conclusions but directionally they appear to be in the ballpark, certainly relative to the U.S.


So you acknowledge that an academic study has problems with its methodology but you blindly accept its conclusion anyway? If the method is unsound then the conclusion, by definition, is questionable. Yet it appears that you accept the conclusion anyway. Why is that?

But then, why listen to me? Who am I, right? Based on your response to an earlier exchange (a month or two ago), what on earth does a commission hungry MFDA saleswoman know about all of this complicated stuff anyway, right? But I'd challenge you to focus on the message, not what you think you know about the messenger. Sorry, this stuff gets me riled up. Time to turn off the computer and grab a cooler.


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## Jon Chevreau (Apr 4, 2009)

Never mind the Tufano study then. Let's go with the Vanguard numbers that were in the column in the paper. They said U.S. Expense Ratios rose from 1.08% to 1.19% between 1975 and now. Then we'll go with the 2.42% average MER for Canadian mutual funds used by Mornginstar's Rudy Luukko to describe U.S. and Canadian equity funds (keeping in mind global are higher and bond funds lower).

If you have the average MER including money market and fixed income funds, please supply it. Let's assume they take the average down to 2%. That's still a lot more than 1.19%. And it's well known that the main reason for the difference is that their trailer fees are roughly half the level of ours. 

No doubt Canadian advisors give twice as much service and advice for that extra compensation and that's great. But why do discount brokerage customers have to pay the same trailers on A Class funds when they get no service at all?

Have a great thanksgiving.


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## humble_pie (Jun 7, 2009)

sometimes the week prior to a holiday can be gritty.

i haven't read mr. chevreau's article yet & doubt i will, because i don't buy mutual funds and only buy a very few niche or specialty ETFs. Even with ETFs, i am never happy about the uncontrollability of the tax consequences.

but, gritty week or not, what malaise could have brought on an insulting post like your opening salvo here to a respected journalist, mr. ontario fancy advisor. Please remember you have told us yourself that you cannot sell ETFs to your clients because you don't hold the necessary license.

are you perhaps feeling edgy because investors are migrating away from canada-based mutual fund salesmen and towards online brokers, where their choices suddenly explode to include funds, ETFs, stocks, bonds, debentures and options on all north American exchanges, as well as countless foreign stocks in the form of ADRs and ADSs and single country ETFs sold on US exchanges.

it's my belief that this migration is irreversible and its speed is increasing exponentially. Mr chevreau and other journalists have gotten the drift.


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## OntFA (May 19, 2009)

Jon Chevreau said:


> Never mind the Tufano study then. Let's go with the Vanguard numbers that were in the column in the paper. They said U.S. Expense Ratios rose from 1.08% to 1.19% between 1975 and now. Then we'll go with the 2.42% average MER for Canadian mutual funds used by Mornginstar's Rudy Luukko to describe U.S. and Canadian equity funds (keeping in mind global are higher and bond funds lower).
> 
> If you have the average MER including money market and fixed income funds, please supply it. Let's assume they take the average down to 2%. That's still a lot more than 1.19%. And it's well known that the main reason for the difference is that their trailer fees are roughly half the level of ours.


What's clear Mr. Chevreau is that you appear set to go down a path without regard to the facts. If you want a serious comparison of Canadian and U.S. fees, you'll have to refer to a 2003 academic paper from Karen Ruckman of Simon Fraser University (Ruckman, K., 2003, "Expense Ratios of North American Mutual Funds," Canadian Journal of Economics, Volume 36(1), p.192-223). If my memory is working, what that paper will tell you is that the raw difference, when controlling for various factors, such as the 10:1 population difference, is that our funds cost about 40-50 basis points more per year over the U.S.

The other issue, Mr. Chevreau, is that the comparison that you keep sticking to is meaningless. I think I've said so three times in this thread. I know you're intelligent so I presume that you think I'm so biased that you just don't believe me. That's your choice but it's a bad choice.

You keep talking about averages. Whoop-dee-doo. You are a DIY investor. You want active management. Maybe you want passive management. Maybe you want a bit of both. Well, guess what? Even in this country where we supposedly bend investors over our desks and rape them in fees, you can get high quality actively managed equity funds for less than 1.5% per year. You want passive, I'm pretty sure you can structure a passive portfolio for less than 0.5% with 100% Canadian products.

No individual buys the average. The mutual fund investor population, as a whole, by the average. But if we boil it down to you or the next person and what is available for that person to invest in, this is the practicality of the argument.


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## OntFA (May 19, 2009)

humble_pie said:


> but, gritty week or not, what malaise could have brought on an insulting post like your opening salvo here to a respected journalist, mr. ontario fancy advisor.


First of all, that's not way to speak to a lady. That's Ms. OntFA. And I did apologize for getting so riled up. But it's true that I ranted anyway.

The malaise, by the way, is something called passion for one's work.



humble_pie said:


> Please remember you have told us yourself that you cannot sell ETFs to your clients because you don't hold the necessary license.


This is true. I freely admitted it and reminded you of it. If I wanted to be really sneaky, I could have called myself a broker. I could have called myself a fee-only broker. I could have made up anything. But I didn't. Since I'm already posting under an alias, I figured I would come clean on other details.

But whether I'm licensed to sell mutual funds, stocks or pencils does not change the facts. You may choose not to accept the facts from a lowly MFDA advisor but facts are facts. Not holding a license to sell ETFs doesn't preclude me from becoming educated about them. Yes, I have to be careful what I say to clients about them because regulators won't let me talk about them in too much detail. But c'mon, I even knew that the MER on VTI had crept up. It's a simple data point but it demonstrates that I keep tabs on this stuff because they are a mainstream vehicle.



humble_pie said:


> are you perhaps feeling edgy because investors are migrating away from canada-based mutual fund salesmen and towards online brokers, where their choices suddenly explode to include funds, ETFs, stocks, bonds, debentures and options on all north American exchanges, as well as countless foreign stocks in the form of ADRs and ADSs and single country ETFs sold on US exchanges.


Let's be clear about something. Nowhere did I put down ETFs. I think they're terrific vehicles. I just don't sell them. In fact, I have had many clients come to me from discount brokerage firms after having their heads handed to them because they traded too much, ended up paying boatloads in commissions and then traded poorly to boot. So, I don't take issue with discounters, ETFs or any of it.

What I take issue with is a meaningless comparison that educates nobody and is designed to further an agenda. To that I responded with some facts, including a link to the author of an academic paper on the topic.



humble_pie said:


> it's my belief that this migration is irreversible and its speed is increasing exponentially. Mr chevreau and other journalists have gotten the drift.


Mr. Chevreau deserves credit for writing about ETFs. But this crap about comparing averages and ETFs to active load funds and all of the other stuff....just got me going.


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## sprocket1200 (Aug 21, 2009)

PMS...let's move on.


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## humble_pie (Jun 7, 2009)

re chevreau's complaint:
"But why do discount brokerage customers have to pay the same trailers on A Class funds when they get no service at all?"

i always chuckle when i glimpse the discounts slipping an exceptionally good profit into their otherwise slightly threadbare pockets. Discountland is a low-markup industry, and by and large the discounts offer services that are exceptionally good value. Where else can an investor buy a security, own it for years, have its value tracked on monthly statements, have its dividends reliably collected and paid, have its mergers, buyouts and reorgs unfailingly reported in full detail, and all this for less than $10.00.

so the discounts keep a sharp eye out for inconspicuous, perfectly legal little nooks & crannies where they can unobtrusively increase their earnings. They would probably counter mr. chevreau's criticism by pointing out that they do indeed offer mutual fund research and selection tools. In several cases, staff includes dedicated fund representatives who are fully licensed and who do offer personalized advice to clients.

if investors felt sufficiently outraged by the trailer fee situation, i am convinced that they could mount a successful insurrection. Enough clients protesting loudly and frequently at full volume, and the big discount houses would probably modify their practices.

there is one other little-known area where the discounters are making an unholy profit. This is the conversion back into CAD of dividends paid by canadian payors initially in USD only. Three common examples are barrick, biovail and thomson-reuters. In the days when inco, falconbridge & noranda existed as canadian miners, their dividends were also initially paid in US dollars.

when these stocks are held in CAD-denominated accounts, which is how most canadians hold them, the transfer agents charge an exchange fee to convert the original USD dividend into canadian. Presumably the banks and brokerages each have their own exchange fee to add, as the dividend snakes its way along the chain, until it eventually lands in the investor's account in CAD without his ever being informed as to what has happened. All he knows is that his dividend amount appears to fluctuate - because of the fluctuating currency exchange rate - but it's unlikely that he's going to pay attention or ask why.

the total of the exchange fees usually amounts to just under 2% of the amount of each dividend. If this happens once or twice it's not worth bothering with, but if one holds barrick or thomson over, say, 10 or 12 years, then one winds up paying significant exchange fees that are nothing more than an unobtrusive windfall grab by the custodians.

it's a good idea to keep canadian stocks that pay US dollar dividends in US accounts. Brokerage systems are easily able to detect whether the payor is canadian or not, and will be able to render an accurate T5 tax slip with full canadian dividend tax credit.


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## OntFA (May 19, 2009)

humble_pie said:


> re chevreau's complaint:
> "But why do discount brokerage customers have to pay the same trailers on A Class funds when they get no service at all?"


I agree with this. Fully loaded funds should not be sold by discounters. And DIYs should have access to F series shares.



humble_pie said:


> if investors felt sufficiently outraged by the trailer fee situation, i am convinced that they could mount a successful insurrection. Enough clients protesting loudly and frequently at full volume, and the big discount houses would probably modify their practices.


I see it differently. I think investor outrage will accomplish little. On the other hand, investors dumping all of the A class funds and buying only cheap no loads and ETFs might get their attention. And it might grab the attention of fund companies too.


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## Rickson9 (Apr 9, 2009)

OntFA said:


> On the other hand, investors dumping all of the A class funds and buying only cheap no loads and ETFs might get their attention. And it might grab the attention of fund companies too.


Who's benefits from promoting that strategy?


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## OntFA (May 19, 2009)

Rickson9 said:


> Who's benefits from promoting that strategy?


My suggestion was in response to humble pie's suggestion that Canadian investors should be outraged about the fact that discount brokers earn full trailer fees but for a fraction of the service of full service brokers. My suggestion was to simply forget letters, e-mails and phone calls. Send a message with your money.

Don't buy A class funds and get rid of the ones you have. That way, fund companies might consider selling F class through discounters. Or, at the very least, they might create a cheaper share class with a reduced trailer. Either way, investors benefit.


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## Rickson9 (Apr 9, 2009)

OntFA said:


> My suggestion was in response to humble pie's suggestion that Canadian investors should be outraged about the fact that discount brokers earn full trailer fees but for a fraction of the service of full service brokers. My suggestion was to simply forget letters, e-mails and phone calls. Send a message with your money.
> 
> Don't buy A class funds and get rid of the ones you have. That way, fund companies might consider selling F class through discounters. Or, at the very least, they might create a cheaper share class with a reduced trailer. Either way, investors benefit.


Probably true, but Canadians as a whole aren't interested enough in their finances to know to be outraged.

As somebody who works in sales, I know that I can sell anything by tailoring the benefits of a product to a customer's needs and minimizing the disadvantages. As long as the majority of Canadians defer financial responsibility to their advisors, I don't anticipate a wholesale shift in capital allocation.


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