This text is taken from Courrier de l’économie. Click here to subscribe.
The issue of fees has always been a cause of friction or debate in the mutual fund industry. But how exactly are mutual fund management fees calculated, wonders one of our readers, Michel Beaudoin.
This question received particular attention in a survey conducted in December for the organization FAIR Canada, dedicated to the defense of investors. The survey solicited feedback from 1,000 retail investors. Most respondents expressed concern about paying too many fees (77%) and said they did not understand the fees charged (63%). Only a third feel very confident about their understanding of investment fees. The survey also shows that only 39% of respondents agree that they get good value for the fees they pay, although this perceived value of advice increases with the amount invested.
Our reader’s interest in the subject is therefore widely shared. Especially since the list of costs is long. Here is an overview, taken from the information available on the website of the Autorité des marchés financiers (AMF).
First, it should be mentioned that these fees vary from one fund to another. They will generally be higher for a segregated fund, then for a mutual fund, and lower for an exchange-traded fund. The AMF is careful to rightly point out that higher fees are not synonymous with better returns, and that each dollar paid in fees is a dollar less in return.
You will have to rely on the document Fund Facts accompanying each of them. We find there:
- unit purchase costs and annual impact on a $1,000 investment;
- redemption fees (applied when selling units) and the annual impact on a $1,000 investment;
- management expense ratio (MER);
- the trading expense ratio (TER);
- percentage trailing commissions.
That said, let’s look at them in more detail.
Purchase costs or acquisition costs
If these charges apply, they are deducted from the amount you invest when you buy the units. “If a fund charges a sales charge, these can be up to 5% of your investment. If you invest $1000, your initial net investment will be $950. »
These fees are negotiable and may vary depending on the size of the investment.
Redemption fees have been prohibited for mutual funds since June 1, 2022. But for funds purchased before and with such fees, they will be paid on sale (i.e. at the time of redemption). They are calculated according to a percentage of the value of the units at the time of purchase or of their value at the time the redemption is requested.
When they apply, these fees will generally decrease according to the number of years you have held the units. For example, they can be 6% of the value of the investment the first year, then decrease by 1 point each year, down to zero after six years of detention, illustrates the AMF. In addition, some of these redemption fee funds acquired before June 1, 2022 will allow the redemption without charge of a pre-determined annual percentage of units, usually 10%.
Having done this overview, it should be noted that no-load or redemption funds are not without costs. Management and operating fees are always charged. These costs are deducted from the fund’s assets, reducing the return. They can also be traded depending on the size of the investment.
Let’s see them in more detail.
They are generally calculated based on a fixed percentage of assets under management. They cover, among other things, administration costs, portfolio management services, marketing and commissions paid to advisors. They generally vary from 1% to 3% depending on the type of fund (an equity fund can cost more to manage than a bond fund, then a money market fund), depending on the management style (a active management requires more analysis and transactions than a passively managed index fund), depending on the method of distribution (a management company using brokers or external advisers will have to pay for their services), and depending on the nature of the fund (a segregated fund and then a mutual fund will be more expensive than an exchange-traded fund, which often has fees below 1%).
Note that these fees include trailing commissions paid to dealers and advisors. Since June 1, 2022, it is no longer permitted to pay such commissions to brokers who do not carry out an assessment of the suitability of the investment to the profile of the investor, in particular because the investor is autonomous and carries out even its transactions. We think of discount brokers or those who use an online trading platform.
It should also be noted that there are funds with no trailing commission, called series F, intended for investors who pay their broker themselves, which avoids double remuneration of the representative.
These charges range between 0.1% and 0.5% of the fund’s net assets. They cover, in particular, the fees of the auditors and legal advisers, printing costs, remuneration of the custodian, bank charges, the costs of printing statements and the costs of preparing and distributing the prospectus.
They are linked to the fund’s transaction costs and usually amount to 0.05% of net assets.
Finally, the AMF adds that the management expense ratio (MER) that we often see indicates the percentage that the management and operating expenses represent in relation to the average net assets of the fund. It indicates how much it costs to administer and distribute the fund. It falls under yield reduction.
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