Investment Fees Mini Series | Part 1

Curtis Haigh Blog

people counting coinsThis blog is part of our Precision Financial Mini Series on Investment Fees

Understanding investment fees is no small feat. Fee questions are often met with confusing explanations that leave even a savvy investor feeling frustrated. At Precision Financial, we want you to understand what you are paying for and why, so we’ve created a blog mini-series on investment fees. We focus on the most common fees paid, who receives them, and include questions you can ask your financial planner to gain further clarity.

The Management Expense Ratio (MER)

The MER is an ongoing fee paid on your investments. This fee is typically calculated as a set percentage, and charged monthly to the investor.  Rates vary, but the MER is calculated as a percentage of your assets under management.  A $10,000 investment with a MER of 2.5% means you will pay $250 annually in management fees. As your investment increases in value, the percentage paid (2.5%) stays the same, but the dollar amount paid in fees increases, since the value of assets has increased. Similarly, if the value of the investment decreases, the rate stays the same but the dollar amount paid decreases.  Additionally there are certain exceptions in this case with the introduction of fee banding, many fund managers offer reduced fees for larger assets under management. 

Imagine the MER is a pie that is to be divided among the following parties:

  • Your financial planner (the individual or team that builds your plan, identifies funds, and monitors your investments with you)
  • Intermediaries (Ex: a trust company used to manage income distributions and tax slips and track investment fees)

Unsurprisingly, the fund manager is paid because the fund requires expert management to perform. There are also administrative requirements, such as issuing statements to investors and completing regulatory filings. An intermediary is paid because there are administrative requirements for managing income distributions. But you may be wondering why the financial advisor gets a piece of the pie, especially when they are not involved in the day to day management of the fund.

The answer lies in the work completed by your financial planner or financial advisor well before you make your purchase. Your financial planner will take the time to assess the product’s suitability for you by by evaluating your risk tolerance and taking the time to understand your goals and objectives. In the industry, this is referred to as KYC, or “Know Your Client” and it takes a significant amount of your financial planner’s time to present and monitor with you.

After you purchase the investment, your financial advisor will regularly assess the investment’s performance to determine if the fund is still appropriate for you. Remember that your financial situation can change, so this step is important to determine if adjustments to your financial plan are needed.

Key Question: Ask how the management expense ratio of your investment measures up to comparable investments on the market. 

Your financial planner should be helping you decide what investments to purchase from a cost-effective standpoint. Ask to see comparable investments and question whether you can get a similar return elsewhere with lower investment fees. That being said, remember that there can be legitimate reasons for paying higher investment fees, and your financial planner or financial advisor should be happy to explain those reasons to you.

Join us for our next blog, where we discuss the fees that you pay for purchasing your investments, otherwise known as sales charges.