Why Management Fees Matter

If you are one of the many people who buy Exchange Traded Funds or mutual funds through your personal investment accounts or employer sponsored plans, you have probably seen the term MER. It stands for Management Expense Ratio.

Most people see it. Few people really understand it.

What is an MER?

Simply put, the MER is the annual fee a fund charges you to own it.

That fee covers portfolio management, administration, legal, compliance, marketing, reporting and everything else required to keep the fund running. In other words, it pays for the structure that allows you to invest in a basket of assets with one click.

It is the cost of convenience.

The important thing to understand is that this fee is not sent to you as a bill. It is deducted directly from the fund itself on a regular basis. Often daily. That is where people get tripped up.

How is the fee actually collected?

You never receive a statement saying you paid $X in fund fees this year. Instead, the fee is quietly removed from the pool of money inside the fund. That reduces the fund’s value, which reduces your return.

Let’s walk through a simple example.

You invest $10,000 in a fund with an MER of 1 percent. The share price is $100, so you own 100 shares.

After one year, the underlying investments earn 6 percent. Without fees, your investment would grow to $10,600. But the MER still needs to be paid.

One percent of roughly $10,600 is about $106. After the fee, your investment is worth approximately $10,494.

Your real return is 4.94 percent, not 6 percent.

You do not see $106 disappear from your account. Instead, the fund price simply grows a little slower than it otherwise would have.

What does that look like daily?

A 1 percent MER divided over 365 days equals roughly 0.00274 percent per day.

On a $100 share, that works out to about $0.00274 per share per day.

It sounds microscopic. And it is. But it never stops. The fee is taken regardless of whether markets are up, down, or flat.

Imagine the market jumps 1 percent in a day. On a $10,000 portfolio, you expect to gain $100. But the daily fee drag still applies. Instead of being up the full $100, you are up slightly less.

Most people will never notice this. And that is exactly why it works so quietly.

Why fees matter more than people think

The real impact shows up over time.

Let’s say your portfolio grows to $100,000. That same 1 percent MER is now costing you about $1,000 per year. If your portfolio grows to $500,000, the same fee costs $5,000 per year.

And remember, this is happening every year. Compounding works both ways. Returns compound for you. Fees compound against you.

Over 20 years, even a 1 percent difference in fees can mean tens of thousands of dollars less in your portfolio.

And here is the uncomfortable truth. Most actively managed funds with higher MERs do not consistently outperform low cost index ETFs after fees. The data over long time periods is very clear on this. Higher cost does not reliably equal higher return.

What should you do?

There are two common places where high MERs show up.

The first is bank sold mutual funds. Many of these have MERs between 1.5 percent and 2.5 percent. Meanwhile, broad market ETFs can cost 0.05 percent to 0.25 percent.

If you are holding bank mutual funds, start comparing them to similar ETFs. Often you can get nearly identical market exposure for a fraction of the cost. Switch to ETFs.

The second place is employer sponsored RRSPs.

Many employer plans offer limited fund choices and sometimes the MERs are higher than what you could get on your own. Read your plan documents carefully. Several employer plans I have participated in allowed one free transfer per year or a low cost transfer (~$25-$50).

For years, I transferred funds from my employer RRSP into a self directed RRSP once per year or every year and a half. It was not complicated. It just required paying attention and filling out some paperwork.

If you truly cannot find a low cost ETF alternative, you could attempt to replicate the fund by buying the underlying stocks yourself. That is more work and requires discipline with rebalancing. For most people, low cost broad market ETFs are the simpler and cleaner solution.

Parting thoughts

Be aware of the fee structure in every investment you own.

A high MER does not guarantee better performance. In fact, after fees, many high cost funds end up delivering market like returns at above market prices.

Fees are one of the very few things in investing that you can control completely. You cannot control markets. You cannot control interest rates. You cannot control recessions.

But you can control what you pay. And over decades, that small decision quietly becomes a very big one.