What costs are included in a mutual fund’s management and operating expenses (MER)?

Each mutual fund is managed by an investment professional, with help from other staff, such as researchers. The manager gets paid a fee from the fund for making the investment decisions. The MER covers costs such as:

• Fees paid to advisers for the service they provide to clients buying the fund. The adviser will continue to get a fee for service as long as the client owns the mutual fund.
• Bookkeeping and administrative fees
• Filings with the provincial securities commissions
• Legal fees
• Audit fees.

How do loads work?

There are three types of loads

1.      Front-end load or initial sales charge (ISC):

Some mutual funds charge a fee when you buy its units. This is a percentage of the amount that you are investing in the fund, for example, 2%. The fee is paid to the mutual fund dealer who sells you units of the fund. You can often negotiate this fee with your adviser.

2.      Back-end load or deferred sales charge (DSC):

Some funds charge a fee when you sell units of the fund. The fee goes to the mutual fund company. The longer you hold a fund with a DSC, the less you will be charged when you sell it. If you hold it long enough (between five and seven years), there is no charge.

Example: You may be charged a fee of 5.5% if you take your money out after one year. After three years, the fee may be 3%. Then, after six years, there may be no fee at all. Some companies let you take a certain percentage of your money (usually 10%) out of the fund each year without charging you a fee.

3.      No load:

If a fund does not charge a fee when you buy or sell units, it is called a no load fund. A no load fund is not always a better deal than a load fund. Be sure you compare the MER and other important information about each fund before you decide.

Each fund has a series letter that tells you about these fees and how they are structured. The series of mutual fund units you choose should meet your overall investment profile and financial needs. Learn more now.

Tip: Sometimes advisers will suggest that you switch from a back-end load to a front-end load fund. If your advisor agrees to waive the commission in writing, there is no problem with switching. If the front-end load fund has a lower MER, it could be to your advantage. Carefully compare the fund your adviser wants you to sell and the one he or she wants you to buy. If you're still unsure, get advice from an expert. 

How do trailer fees work?

Mutual fund companies often pay fees to registered dealers who sell their funds. The dealer receives these fees each year you hold the fund. Trailers fees differ from one fund to the next and between fund companies. They typically range from 0.25% to 1% of the amount invested.

The dealer may pass on the trailer to your individual adviser. Some sales people may earn 15%, while others can take home as much as 80% of the trailer fee. The money for the trailer comes from the MER. It pays for the service the adviser provides you, the mutual fund buyer.

Tip: If your adviser receives a trailer, make sure you get some benefit from this fee. For example, you can expect your adviser to provide a yearly review of your mutual fund investments. You should also get prompt answers to any questions you have.

What other fees may I have to pay for a mutual fund?

• A fee to switch or exchange one fund for another    
• An annual trustee fee if the mutual fund is part of your Registered Retirement Savings Plan (RRSP)
• An initial fee to start up your account
• An advisory fee
• A processing fee for closing an account

How can I lower my costs and get more value?

• Look at a fund’s history. Weigh its performance against its MER.
• Compare the fund’s MER to other funds of the same type. Keep in mind that sometimes you pay a higher MER to get better management and a higher return. There is no guarantee though! Sometimes a fund charges a higher MER, but doesn’t perform as well as other funds of the same type.