April 3, 2012 – How Much do Mutual Funds Really Cost?

Many investors are confused over how much their mutual funds cost and our industry does not do such a great job clarifying the issue.

Let’s look at the larger mutual funds in Canada to see what fees are being charged. In a report prepared by James Gauthier of DundeeWealth, published on May11, 2011 the average percentage charged (called the Management Expense Ratio or MER) to manage 16 of the largest load companies in Canada was 2.51%. (source: The Trading Expense Ratio and the Total Cost of Fund Ownership: 2011 Edition by James Gauthier)

Hang on – what does “load” mean? Load is the commission paid to the investment advisor. It could be an explicit, upfront fee of NIL to as high as 2%. It could also be a deferred fee, also called a DSC (Deferred Sales Charge) or back end load. The DSC could be 2.5% to 3% if you agree with your advisor to stay invested with the mutual fund company for at least four years. It could be as high as 5% if you agree to stay with that fund company for at least eight years. You are hit with this fee if you come out before the agreed period of time has lapsed and the fee declines the longer you hold the fund.

Both load and no load funds have management expenses that are charged to the mutual fund investor every year and this is disclosed in a prospectus. However, there is an additional fee called the Trading Expense Ratio (TER). The only way you find that fee is to pour over the financial statements of the fund itself, which is what Mr. Gauthier did. He found that the average TER for the 16 fund companies he reviewed was 0.17%. So total annual fees charged would be MER+TER which equals 2.68%.

You don’t see these fees because they are “embedded”. What you see is the net earnings after the fee has been charged. So, the average Canadian equity fund lost 10.08% in 2011. Really it lost 7.4% and charged you 2.68% for a net loss to you of 10.08%.

See page 151 of my book, In Short: Successful Investing During Turbulent Times, for how this will change in the future and page 112 for an alternative to traditional mutual funds.

This article was prepared solely by Larry Short who is a registered representative of HollisWealth®, a division of Industrial Alliance Securities Inc. (iA Securities), a member of the Canadian Investor Protection Fund (CIPF) and the Investment Industry Regulatory Organization of Canada (IIROC).The views and opinions, including any recommendations, expressed in this article are those of Larry Short alone and not those of HollisWealth®