Smith Falconer Financial Group
November 05, 2023
Unpacking MERs
In our recent blog post, “Active Share”, we discussed the benefits of actively managed investment strategies. We highlighted that active equity fund managers can only look to achieve outperformance, in excess of fees, by actually being different from the benchmark index.
This week, we want to discuss the fees imbedded in the actively managed funds that we routinely recommend to clients. The cost of investing in one of these funds, is the Management Expense Ratio (MER). It is expressed as a percentage, and calculated by dividing a fund’s total annual expenses by its assets.
MERs are made up of three parts: management fees, operating expenses, and taxes. The management fee portion pertains to investment management, and the due diligence portfolio managers and their teams do to make informed investment decisions. A portion of the management fee, called a “trailing commission”, can be attributed to your Investment Advisory team for the communication about the strategy that they provide. Operating expenses include reporting, tax slips, statements, accounting, fund valuation, and the cost to hold investors’ assets. Taxes are both GST and HST.
MERs can vary based on if the fund is held in a transactional or fee-based account. In the majority of cases, transactional accounts hold Series A funds, whereas fee-based accounts hold Series F funds. Series F funds typically have a lower MER than their Series A counterparts, as the investor pays a fee to their advisor through the account and not through a trailing commission included in the MER. A benefit of this structure is that fees paid to your advisor are tax-deductible in non-registered accounts.
In both accounts, the MER covers the compensation of investment professionals for what they do every day – investing for long-term outperformance. Research completed by the Investment Funds Institute of Canada (IFIC) shows that investors with advice are found to accumulate 3.9x more assets after 15 years than comparable non-advised investors1.
In understanding your investment objectives, Smith Falconer Financial Group (SFFG) is able to present you with a custom strategy, that is monitored and reviewed for years to come, to achieve long-term growth and peace of mind. These customized investment strategies typically include actively managed equity funds, where expectation of realizing pleasing results is higher with patience and time.
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