Bootcamp: Lesson #4

The Dreaded Management Expense Ratio (MER) 

If you only re-read one of these course lessons, please make sure it is this one. While there can be several complicated and hidden fees associated with mutual funds, the MER is at the top of the list for having the most dramatic effect on your portfolio returns. And in turn, plays a large part on whether you drive a Kia or a BMW when you are 65. Or more importantly, whether you get to retire when you are healthy and able to enjoy your money, or if you are forced to work another 5-10 years simply to support yourself.

On that note:

What if I told you I could help you add over $550,000 to your future?

You are 34 years old, and you are ready to learn how to invest. You notice an ad in the local newspaper for an introduction to investing seminar put on by a well-known mutual funds company, ABC Mutual Fund Company. Intrigued, you attend.

At the event, the free coffee is abundant, and there are many laminated handouts with charts (going up!) and blurbs about assets under management, and out-performance.

Impressed, you agree to open an account with ABC and the next day you transfer the $43,000 from your savings account—an amount you have managed to save since you started working full time at 26.

You take the advice of the Financial Advisor from ABC and begin contributing $350 from each pay period. This (wise!) decision will amount to an additional $8,400/year (assuming 24 pay periods per year, $340 x 24 = $8,400) contributed to your investment portfolio.

As you are leaving the event, you think of one last thing and ask the Advisor, “What are the fees for my new investment portfolio?” He assures you there are no up-front costs to purchase your mutual fund, and that no fees will ever be taken from your account. You find this odd but before you can ask anything further, you note the Advisor has moved on to speak with another client.

30 years pass.

At the young age of 64, you decide it is time to slow down professionally and spend more time in the south of France cycling with your long-time boyfriend, Elliot. You roll up your sleeves and dig into your account statements from ABC Mutual Fund Company to review the available funds available for supplementing your income.

Your scenario:

  • Initial Contribution: $43,000
  • Annual contribution for 30 years: $252,000 ($8,400 x 30 = 252,000)
  • Average rate of return over 30 year period: 8%
  • Balance in your account after 25 years: $862,586

Fantastic, right?!

Over $850,000 that you can start to withdraw from. Are you happy?

You should not be.

You should be proud that you started investing at a young age and that you made regular and automatic payments to yourself (via your investment account), but you should not be happy.


Because you are a smart woman and all this time, you knew it was odd that you did not seem to be paying any fees for an account at the ABC Mutual Fund Company. But you were so busy being awesome at what you do best, professionally and personally, that you did not take the time to investigate why something that seemed too good to be true, was.

Little known fact: The average Canadian pays 2.5% MER (Management Expense Ratio) on their equity mutual fund holdings.

What is an MER? It is the Management Expense Ratio, and it is the [hidden] fee that the mutual fund industry charges to manage your assets. It is the fee that is used to pay Jane Smith and her research team to pick stocks. It is the fee that is used to pay the operating costs—rent, trading costs, heat, information technology—of the ABC Mutual Fund Company. It is the fee that is used to pay that Financial Advisor you met at the ABC Mutual Fund Company investing seminar a commission each and every year.

It is a fee paid by YOU.

Why do I claim the MER is hidden? Because fund companies publish the fee almost nowhere that you would ever see it, including your account statement. Yes, it is published by law in the fund’s mutual funds simplified prospectus, a document that is often over 40 pages long and comprised of very fine print. And if you know what you are searching for, the fee can be found online. But, the mutual fund industry has a vested interest in you never learning the MER exists, or ever being able to easily discover the amount.

And you didn’t, did you?

You do not see the fees in your monthly statements because the mutual fund company takes the charge from your portfolio returns before they report your gains (or losses) to you. If that is not the definition of hidden, I am not sure what is.


You have $100,000 invested in a fund at the ABC Mutual Fund Company. The fund has a 2.5% MER, and a return for 2015 of 5.6% (from a diversified portfolio of stocks).

ABC Mutual Fund Company calculates the MER on the total amount you have invested in the fund. (To clarify: whether the fund earns or loses money, the MER will be taken on the entire amount of your account.)

Considering the above fact, the MER calculation for a 5.6% return in 2015 would be:

  • $100,000 x 1.056 = $105,600 (total amount invested + $5,600 in gains)
  • $105,600 x .025 = $2,640 fee paid to ABC Mutual Fund Company for 2015
  • Annual return reported in the financial media for 2015: 3.1% (calculated as 5.6% earned from gains, less the 2.5% fee taken by ABC = 3.1%)

Will ABC advise you of the $2,640 you paid for 2015 MER fees to you via any recognized communication method—email, mail, text, or on your account statement? No.

Now that I have shown you the example above, based on a straight $100,000 investment in a single year, I would like to build on your sample 30-year scenario from start of this lesson.

To recap:

  • Initial Contribution: $43,000
  • Monthly contribution: $700
  • Average rate of return over 30 year period: 8%
  • Balance in your account after 25 years: $862,586
  • (opportunity cost of $862,586 includes fees of $260,413)

Opportunity Cost of fees paid to ABC Mutual Fund Company: $650,902

Did you pay the ABC Mutual Fund Company $650,902 in fees over the 30 year period? No. You paid $260,413 in total fees. However (this is important!) the removal of $260,413 from your account over 30 years and it’s subsequent loss of ability to compound (i.e. the fees taken each year stopped earning returns), was devastating to the portfolio.

How devastating? The effect of the $260,413 in fees not compounding, caused your portfolio to not earn an additional $390,489 for your retirement. In France. With Elliot. The $260,413 in fees plus the $390,489 in lost growth that equals a lost $650,902 from your final account balance.

It’s a lot, eh? Let me put this into perspective. If you had not paid any to the ABC Investment Company, and there was no other change to your contributions or portfolio returns—so all things being equal—at 8%, you would have $1,513,488.

Instead you have $862,586.

Still think that coffee was free 25 years ago?

You ask, “OK Nanci, you have made me realize that there is always going to be a cost to investingeither in MER or commissionwhat is the alternative? Where is this $350,000 you are going to help me add to my future?”

Does anyone remember the answerfrom Lesson #2? Yes, your are right: ETFs.

With ETFs, asset selection is determined by computer algorithm (not by Jane Smith and her team). And there is no fleet of Financial Advisors (requiring $$$) selling the ETFs to the public. For these reasons alone, ETF companies can provide access to rock solid diversification at a fraction of the MER of the mutual fund industry.

Here is your 30-year scenario with an ETF:

  • Initial Contribution: $43,000
  • Annual contribution for 30 years: $252,000 ($8,400 x 30 = 252,000)
  • Average rate of return over 30 year period: 8%
  • Balance in your account after 30 years: $1,444,879
  • Opportunity Cost of fees paid to XYZ ETF Company: $68,609
  • (opportunity cost of $68,609 includes total fees of $29,842)

Stay with me! The opportunity cost of $650,902 you experienced with investing in high-fee mutual funds less the $29,842 you could have experienced with low-fee ETFs, would have added $582,293 to your final account balance. Do you think $582,293 would make a difference to you life in the South of France? Cycling and drinking wine? With Elliot?

Question: Can a passive (index/ETF) investment strategy perform as well as active (mutual fund) management?

Answer: Yes.

Fact: In measuring Canadian Equity funds, only 13.6% of active managers outperformed a broad-market alternative after fees, according to a 2015 Morningstar study.

Wow! I hope that was not far too much information to throw at you in one email. It is a delicate balance for me to teach the concepts of investing, provide enough information to back up what I have to say, but not have you become overwhelmed.

Important: As of October 2015, Canadians investor hold over one trillion dollars in mutual funds. This means there is a super high probability that you, or someone you love, is holding mutual funds. At an average of 2.5% MER. Please, please think about sharing this important information on the true cost of MERs with them.

Forward them this email, or invite them to sign up for Investing Bootcamp (this course) at

It is my hope, after this lesson on MERs, that you realize how important understanding your investments is for your future.  Please do not give this knowledge up to anyone, even a trusted and loving husband or partner.

Congratulations! You are almost halfway through this e-course! Four more lessons to go. Watch for Lesson #5: Bonds? I’ll Take One, Thanks! in your inbox in the next few days.

The Fine Print:

Investing Bootcamp is provided as an educational resource and should not be construed as individualized investment advice, nor as a recommendation to buy or sell specific securities. The investments and scenarios discussed in the course are examples only and may not be appropriate for your individual circumstances.

The investing strategies presented in Investing Bootcamp will result in losses during any period of decline in the broad stock and bond markets. All investments carry the risk of loss. It is the responsibility of individuals to do their own due diligence before investing in any index fund or ETF mentioned in this course.