Understanding the costs of investing can be confusing and overwhelming at times. With all of the different ratios and acronyms, it sometimes feels like you need a decoder to make sense of it all.
Meet Thomas.
He’s just one of our friendly and experienced Certified Financial Planners. We recently sat down with him to talk about the costs of investing, from MERs to TERs.
He also gave us the scoop on an upcoming initiative that will help give members a better understanding of the fees they’re paying.
How did you decide that you wanted to become a Certified Financial Planner?
When my father retired over 20 years ago, financial planning wasn’t as accessible as it is now. His investment advisor wasn’t a financial planner and wasn’t able to give him the best advice on his retirement and estate planning.
I saw his experience, and realized that much of the Canadian population was going to be retiring in the next two decades, so I decided to pursue a career as a financial planner. I’ve been helping members with their financial and investment needs since 1996. I became a CERTIFIED FINANCIAL PLANNER® professional in 1999.
What’s your favourite part of your job?
I’m a people person. I like to meet and interact with different kinds of people and listen to their stories. My favourite part of my job is to help them make their dreams come true.
Let’s chat about the costs of investing. Can you breakdown the different buckets of costs for us?
We work hard to make sure we offer financial advice at a competitive cost. The costs of investing are included as part of the mutual fund’s Management Expense Ratio (MER) and Trading Expense Ratio (TER).
There are a few different buckets of costs covered by a mutual fund’s MER:
- Management Fees: These are paid to the fund manager to make investment decisions for the fund. The fund manager determines which securities to buy or sell. These decisions must reflect the investment objectives of the fund.
- Operating Expenses: This covers the costs needed to operate a mutual fund. This includes bookkeeping, reports, statements, prospectuses, legal and audit costs, and filing with securities commissions.
- Dealer/Advisor Services: This is the trailing commission paid by the fund company to the dealer/advisor for their services. This includes financial planning and estate planning. It also includes account administration, trade processing, annual tax reporting and regulatory compliance. At many financial service institutions, this trailing commission is paid directly to the financial planner. At Coast Capital Savings the trailing commission is paid to Coast Capital. I am then paid a salary plus bonus for the service and advice I provide. This helps to make sure that I always put members’ interests first when recommending financial and investment advice.
- Taxes: GST and HST are charged on fees and services.
TER gives you an idea of the trading commissions that were incurred to buy and sell investments inside the fund. It’s equal to the total commissions divided by the total assets in a given year and is expressed as a percentage. When a portfolio manager buys and sells securities more often, then the fund tends to have higher TERs. The TER is independent of a fund’s MER. It typically does not apply to fixed income transactions since commissions for fixed income products are already embedded in the price of a bond.
How can I find out the MER and TER for a mutual fund that I have money invested in?
Your advisor will provide you a Fund Fact Sheet for you to review prior to purchasing a mutual fund. The Fund Fact Sheet provides important information about a mutual fund, including the current MER and TER. You can also find the Fund Fact Sheet on the mutual fund company website or by requesting a copy from your advisor.
Is there any way for me to find out the total amount that I’m paying towards a mutual fund’s MER and TER?
In 2013, the Canadian Securities Administrators introduced the Client Relationship Model (CRM/CRM2) to increase the transparency for investors on the cost of investing and the performance of their investments.
It’s important to note that there are no new fees being introduced – fees have already been collected in relation to your investment accounts. The new regulations are just meant to give investors a better understanding of these fees. This enhanced disclosure will help you better understand your financial position and the value of the financial advice you receive.
Prior to investing in a mutual fund, you as the investor must be informed of the MER and the TER of the fund. As your advisor, I must disclose to you the dollar amount of the MER and TER of your purchase and the dealer compensation in dollar amount from the mutual company to our mutual fund dealer (Worldsource). You must also be provided with the fund information sheet and Fund Fact Sheet which shows the current MER and TER.
What’s the value in having a Certified Financial Planner?
Every member is unique: each person is at a different life stage and has his or her unique personal and family situation. A Certified Financial Planner can help to…
- identify goals at different life stages
- work together to come up with an attainable personalized action plan to reach these goals
- help implement the action plan
- monitor, review and revise the action plan on a regular basis
Thanks for helping to explain this and providing your insight, Thomas!
Want to learn more about the costs of investing and how to maximize your returns and minimize your costs? Schedule an appointment to chat with one of our experienced investment experts.
