MER - the hidden, recurring, annual mutual fund fee - Dec 1998 p. 423
Under the title of "Investors taking cover in savings accounts, GICs" in his December 9th
column in the Report on Business, Andrew Bell discussed the results of nationwide research
about mutual funds carried out for Royal Trust. Among other snippets, Mr. Bell related that "A
huge 72 per cent of RRSP holders who own mutual funds didn't even know what a management
expense ratio was." Of this, a Royal Trust manager said "That did amaze me."
I was not amazed or amused. I've never seen a mutual fund statement* that showed the
recurring annual fee being deducted. How would people know there is a fee being deducted
every year if it does not show up on their statement? Their financial advisors obviously are not
telling them. Equity mutual fund unit holders are being fleeced of $210 per $10,000 (the
average annual fee is 2.1%) each and every year and 72% of them don't even know it. Can you
imagine the stink if a proper financial institution charged $200 every year to hold your $10,000
GIC?
* Where our daughter works, the RRSP mutual fund is "run" by Investors Group. Some time ago, I asked her to request a receipt for the annual fee. She asked in writing. We are still waiting...
MERs take 47% of your money over 30 years
(from the Financial Post - December 24, 1999 Jonathan Chevreau)
"Actuaries like Malcolm Hamilton of William Merscer Ltd. in Toronto and Fred Thompson of
Thompson Actuarial Ltd. in Singhampton, Ont., have shown the the average Canadian MER of
2.1% curtails registered retirement savings plans by 47 percentage points over 30 years"
The Rule of 40
To compute how long it takes mutual fund management expenses to consume one third of your
investment: take 40 and divide by your mutual fund's MER. or...
After "n" years, the percentage of your money you get to keep in a mutual fund is:
(1-MER)n * 100
Gold, Frankincense and MER - December 1996 page 376
Scudder is one of the big American corporations trying to make a foothold in Canada's financial
industry. In the fall of 1996, Scudder ran advertisements inviting mutual fund buyers to compare
differences in management expense ratios (MER). Generally, these recurring annual fees are
higher in Canada. The ads contained this statement. "In 25 years, a one-time $10,000
investment earning 10% per annum would be worth $15,885 more, just because of a 1% saving
in MER."
The statement got me thinking and calculating. When you do you own investing, there is no yearly fee; no MER. How much do we save by doing it ourselves? I took the Scudder example a step further. The average MER on Canadian equity funds is over 2%. Some mutual funds charge as much as 3.75% per year. If a wrap account* is used the annual fees could be in the 3% range. I used a 3% fee for my calculation and bumped the portfolio value to $100,000: according to my calculations, the savings buy investing yourself approach half a million dollars (15,885 x 3 x 10 = $476,550). That's million...half a million...I must be wrong!
Half a million dollars in fees without even counting load or trailer fees. This could buy a lot of research...subscriptions to DBRS and the Bank Credit Analyst even. And, instead of the financial planner getting the gold (trips and new cars), you could. What amuses me about it all is that most mutual fund buyers don't even know they are being fleeced. Last summer, Ellen Roseman, who used to write outstanding columns about mutual funds in the Report on Business (and now writes for the Toronto Star) reported on a survey of mutual fund owners. It found that six in ten fund owners did not know they paid an annual management fee and that four in ten could not name the exact fund they owned.
* The Leaders Program currently being pushed by ScotiaMcLeod and Scotia Discount Brokerage is a wrap account. Forbes magazine says that "Most wrap accounts are lousy deals".
Posted Jan 2000
To compute the real impact of mutual fund fees, click on this URL, go to "investor resources" and click again on "tools" http://www.osc.gov.on.ca
$514,000 of growth become just $193,000 after fees
It's a bit more bother to invest on my own, so, every now and then, I like to remind myself how
much I'm saving by not going the mutual fund route. Speaking in Toronto on December 4,
2000, John C. Bogle, founder of the Vanguard Group, presented, in great detail, data to prove
that "mutual fund investing is an expensive home to long-term investors." One thousand dollars
invested 50 years ago in the S&P 500 would have grown to $514,000. However, with fees of
2.2%*, financial intermediaries would have taken $321,000 of the sum leaving only $193,000
for the retiree. Bogle used the word "shocking" to describe this loss of 63% of the market's
cumulative return to the intermediaries. A link to Bogle's 15 page Toronto speech at
http://www. vanguard.com/bogle_site, with detail of his calculations and fascinating revelations
about mutual funds, is on my web site. *Fees are even higher in Canada: Bogle figures 4.7%.
Now you understand why mutual fund ads tell you to ignore short term price fluctuations and
hold for the long term. Posted March 2001