MER. Management Expense Ratio. Mother#&@%* Eats your Return.

Haven’t heard this term before? Either had I. When I finally paid off my student loan, I went to see a financial advisor at a Big Brick and Mortar Canadian Bank, she talked me into investing in a high MER mutual fund. And I did. For years.

You know when want to buy a car, if you’re interested in a particular model, you do  your research into mileage, expense, reliability, costs, etc. That’s just smart shopping. But I didn’t and I would suggest that most people just don’t consider the fine details  when purchasing a financial product from the bank, like a mutual fund. I certainly did not.

In my ignorance, I did not equate “financial advisor” with salesmen. To me, a car salesman existed entirely to rip you off, a financial advisor was totally different. They are there to give you the best advice possible to manage your money. Why? Because you belong to the bank and so, as a kind gesture, the bank provides free financial planning services to help their customers make good decisions. Because they are kind. Because they want what’s best for you.

But that, of course, is the lie.

And they’ve been successful lying to us for years. Because they were allowed to.

Prior to July 2016, Canadian mutual fund salesmen and Investment Advisors did not have to publish the MERs of a fund they sold you. The MER of course being the fee associated with buying a mutual fund. It’s a yearly fee that you pay to your bank and advisor for “managing” your mutual fund. And these fees are expensive. Usually 2.5% every year for as long as you hold the fund. This adds up quickly.

2.5% may not seem like a lot to invest in a mutual fund, but here’s what Canadian Finance Guru, Preet Banarjee said on the topic last month on the  CBC . The article is titled, “Banks misleading clients on mutual funds”

If you have a fund that has an MER of 2.5 per cent, that’s going to consume almost 50 per cent of the potential value of the portfolio over 25 years,” he explained. “When you frame it that way, it becomes very clear that fees are a big deal.

This makes sense. If you’re mutual fund is returning a conservative 5% a year, half of your returns are going to fees.

50 PERCENT!?

Since I plan on retiring 25 years from now with $1 000 000 in the bank, a MER of 2.5 would cost me $500 000 by the time I’m ready to hang up my white board pens.

Now, of course, you can’t escape fees all together, but you can drastically reduce fees to well below 2.5%. My investments cost me less than 1% currently, and I have plans to reduce them to about 0.3% or less in a few years when I have a little more capital. (I’ll explain exactly how you can do this too in another post, promise)

So, if it’s possible to pay less, why do banks charge such high fees for mutual funds? Because financial advisors are salesmen. And, as they’ve been allowed to hide fees from us for years, they’ve gotten darn good at it.

Do you know what the MER is on your mutual fund? It took me forever to find it. It doesn’t tell me the MER on my bank statement, my T3, my online banking account, or even on the fund’s website, which is supposed to give a detailed history of its performance. I had to find out the MER of my mutual fund in the fine print of the physical paperwork that I signed when I bought into the fund years ago. And I was pissed off.

It gets worse when you imagine that you have a good understanding of how your fund is performing, and you have yet to subtract the MER. Think you’re getting a nice 6% or 7% return on your investments? Sorry, you’re not. It’s more like 6 – 2.5, meaning you’re getting a paltry return of 3.5%. Barely beating inflation.

But that’s going to change. New banking regulations are coming into place this summer which will demand that banks disclose fees when  bankers or advisors push products on their customers. This is from the Globe and Mail,

“As client fees become more transparent, some investors are going to get sticker shock in what they are paying, particularly if they are in mutual funds with high MERs [management expense ratio fees],”

Sticker shock. There’s the used car analogy again.

While focusing entirely on fees rather than your returns is kind of like the tail wagging the dog, it’s important to note just how much these fees are eating into your returns.

But you can do something about it. You can refuse to be a MERman (or MERmaid) but that’s another post.

(Hint: It’s ETFs and Index Funds)

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3 thoughts on “How Understanding Bank Fees Saved Me $500 000

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