No, I don’t mean Creme de la Mer (the uber expensive face cream), I mean MER, otherwise known as Management Expense Ratio.

From my experience, your investment advisor won’t really tell you about this until you ask for it, or look into it yourself.

MER’s were created for mutual funds. Mutual funds are great in a way that it provides diversification (you can get many stocks in one basket, instead of purchasing a stock one by one separately, so you can have holdings in different sectors- which minimizes risk). MER’s exist because someone needs to manage the fund and they need to get paid to do it, they’re not volunteering (as much as that would be great, it’s not the case).

The cost of an MER varies. It can be anywhere from 0.4% to 3.2% (ballpark range). So if you’re thinking of compounding money, it would be a big deal to cut the MER down as much as possible.

So let’s say you invest $5000 into a fund with an MER of 0.4% (e.g. money market funds, TD banks efunds, ETF’s). After one year, you would pay $20 in fees.
If you invest the same $5000 into a fund with an MER of 3.2%, you would pay $160 in fees. That’s a $140 difference! And if you pay that over 10 years, lets say- it’s even more (>$1500 worth of money spent managing your fund)!

So the point is you want to cut the fees down if possible.

So where does that money go? If you check out the chart here, supplied by The Investment Funds Institute of Canada, 40% of the MER goes to your investment adviser, and 40% of it goes the mutual fund company (e.g. Franklin Templeton, Investors Group (eek), Manulife, BMO). The other goes to administrative costs and GST (and the impending HST- but that’s another post).

where your money goes

Besides, if you’re not making money on your investment, or (gasp) are losing money, you’re still paying for the MER.

So next time you’re out to buy a fund, be financially savvy (or at least pretend) ask your adviser what the MER is. Make sure it’s not too high.

You might also want to check out these posts:

1. Mutual Funds Basics