Management fees is quite a simple topic to explore, that’s what is good about it! Yet, many people have money invested and still don’t know what they are. Since it can make what you think is a good investment, something mediocre, I think it’s worth taking a few minutes to discuss about it.
What They Are
Management fees are exactly what they claim to be, it’s the payout of the fund owner to keep your fund running and pay the people who do the research on your behalf. Stock trading and all of that stuff doesn’t pay itself and shall be included in the management fees as well. It will be presented in the form of a percentage which is the management expense ratio (MER). Here is an example found in the fund fact sheet of a Fidelity Mutual Fund.
You might find that sometimes they use other terms or that it’s kind of hard to find the MER, especially on mutual funds because they are normally higher and they sort of shy away from showing it clearly. Also, the MER can vary depending on the trades that they conducted and some other factors. That means that it can change from year to year.
From my own observation, here is my scale of expense ratios from the most expensive to the least, be careful because a higher expense ratio does not necessarily mean better performance!
|2.00% or more||1.00% to 2.00%||0.50% to 1.00%||0.25% to 0.50%||less than 0.25%|
|Very High (Would not recommend)||High (Some investments are more expensive)||Medium (Not bad!)||Low (Now we’re talking)||Very low (Very low, would recommend having a look for sure!)|
The expense ratio affected amount is removed silently from your investment without you even knowing. If, for example, the stock market bulls (goes up full blast) at 10% for a year. Having a 2.00% expense ratio will only make you 8%, minus a, let’s say 2% inflation you’re down to 6%. Now the government big guy has to have its share and that will lower the amount even more (if not in a tax-free account).
Expense ratio might not seem big on the short term but on the long term it can hurt your portfolio big time! Therefore, staying on the lookout for the lowest MER is a must. Be careful of these (way too rich) big banks who have your interest (eum, I mean their interest) at heart and suggest only the highest paying possible investment options (for them!). Yup banking financial advisors can be well in a conflict of interest between their wallet and yours.
I think this comparison speaks for itself! Thanks to BeginToInvest calculator for making our life simple!
How to Get the Best, Only the Best!
Do Your Own Research
Conduct your own research and remember that alternatives exist to high cost mutual funds like index exchange traded funds (ETFs) and so on. Some financial institutions even offer preferable rates along with their self service investing platform. For example, and that’s only because it’s my bank that I know about it, Royal Bank of Canada offers the D series mutual funds which have lower MER than their A series. You just need to be using RBC Direct Investing to benefit from these rates. 1% less MER is pretty well paid just to pick the mutual funds yourself and do a few hours of research per year! This might mean a few thousands dollars after 10-20 years!
Here is a comparison between two funds, one from series A and one from series D, look at the difference for really similar funds. I mean, allocation is exactly the same and the goal is the same, the only difference is the fund number!
A whooping 0.85% less for the series D, worth it? YEAH!
Get the Right Information
You might also want to buy a book and go through it like this one: Mutual Funds for Dummies or ETFs for Dummies. Good books, easy to understand and straight to the point! This will give you a good start to invest by yourself and save a bunch of money. Remember that fees are guaranteed, returns are not, that’s why you want to have as much information as possible to save more. I still think normal people like us should stick with mutual funds/ETFs instead of buying individual shares, our hard earned money is not really worth the risk unless you really know what you’re doing and are already rich enough to build a full portfolio!
Consider index funds like Vanguard or BlackRock iShares which provide ETFs at really small cost (MER). They too often offer comparable (or even better) performance to the actively managed mutual funds (funds that someone is managing to try to beat a specific index or attain a specific goal that might not be aligned with yours, be sure to check the fund fact sheet).
Holy cow! That’s some serious expense ratio! 0.06%!
Mutual Funds Are Still Good!
This doesn’t mean ditch the mutual funds, this simply means that you need to choose your investment vehicles while keeping the MER in mind along with your goals. Some mutual funds do very well and they often offer no-load costs which means that it’s free to put money into them. If you’re the kind of person to setup automatic contributions, this is the thing for you! With ETFs it’s better to do lump sum buying because there are trading costs every time you buy (most of the time around 10$).
To Keep in Mind
The Management Expense Ratio (MER) is what you pay to ensure the fund is being run without your intervention. It includes mostly management fees and trading fees. A higher MER doesn’t necessarily mean better performance and a lower MER isn’t necessarily what is good for your portfolio, it’s a measure that you need to keep in mind while choosing your investment vehicles targeting your goal.
If you need a bit more information, you should go and visit the Vanguard Website!
Hope this helps a few of you! Happy investing!