Management expense ratio (MER) is a percentage of the mutual fund’s assets that is going towards paying the fees that run that fund. The largest part of the fund expense is dedicated to the management fee, but the MER also includes operational costs and related to the day-to-day administration of the fund, such as office supplies, record keeping, legal fees etc. and applicable taxes.
The management fee can further be divided into:
(1) the investment management fee
(2) and the trail commission.
The investment management fee covers the time, research and tools the portfolio managers use in order to find the suitable investment. In a mutual fund, the management fee will include any fees payable to the investment adviser of the fund or its affiliates, and administrative fees payable to the investment adviser. Moreover, management fees paid to mutual funds and other registered investment companies are set forth in the advisory agreement which must be approved by the fund’s board and shareholders beforehand.
The trail commission is the “fee for advice” charged and represents the access to, service and advice from the advisor and their financial institution. This cost may be higher or lower depending on the amount being managed. Also, fee represents the compensation for the managers’ time and expertise for selecting stocks and managing the portfolio. There can be a high disparity in the amount of fees charged that is generally attributed to the investment method used by the fund’s manager. The more actively managed a fund is, the higher the management fees that are charged.
It is a fee that is not directly charged to the investor, but to the fund itself, thus not appearing on any transaction order form or account statement. However, it is important to be aware of the MER and the percentage it represents from the entire fund, as it may considerably influence the returns. Some criteria that should be taken into account is the size of the fund (smaller funds tend to have higher ratios as the costs are divided between fewer investors), sales charges and the style and management plan. Some types of funds, like international funds, or small cap funds, will have higher expenses than a large cap fund or bond fund.
It is best to look at expenses from the point of view of the entire portfolio of mutual funds as expenses can be kept reasonable if the mutual fund operating expenses are kept low.