There were many a curious onlooker back towards the end of 2012 when ING Direct was purchased by Scotiabank. The sale of ING Direct came surprise and left existing clients covered in a shroud of unanswered questions. It wasn’t until a year later when, after reaching out to 10,000 Canadians, they settled on a new fresh name: Tangerine. Well more of the peel has been removed as they get set to launch on April 8th, 2014. The countdown clock is ticking at T-5!
When last we looked at the MER, we made a comparison of two different MER values where the rate of return, amount invested and period of time were assumed to be equal. This was to illustrate how the different MERs (low MER of 0.33%; high MER of 2.18%) impact investments in the long-term. Over 10 years the money invested, the high MER consumed 12% of the entire investment amount, compared to only 1.7% by the low MER. In the words of John Bogle, founder of Vanguard Group which manages 2 trillion in assets, “the magic of compound returns is overwhelmed by the tyranny of compounding cost.”
In Canada, MERs typically range from 0.12% to 3% with the average at 2.15%- the highest in the world according to a 2013 Morningstar report. Investing strategies indicate where within the range the MER falls; higher MERs are associated with actively managed funds while lower MERs are associated with passively managed funds.
The management expense ratio (MER) is the cost of managing and operating a mutual fund. The MER, by definition, is the ratio between the sum of the management fee and operating expenses divided by the total value of assets held within the fund (or portfolio value); it is expressed as a percentage of the portfolio value.
To better explain the different types of fees associated with investing, let’s take a look at the costs to invest using an example. If a novice investor, like myself, was to take $1000 and invest it in the IA Clarington Focused Canadian Equity Class – Series A (CCM9900) mutual fund with RBC Direct Investing brokerage account, the fees would look something like this:
The investment landscape is littered with a minefield of fees and expenses that can be difficult to navigate for first time investors. The costs depend on the types of investments made and how they are purchased. The fees that apply to a specific fund can be found on the fund’s prospectus or annual report. Here is a list of fees that investors can expect to come across when looking to make an investment.