[3] The impact of management fees on return

The higher the management expense ratio (MER), the bigger its effect on your return. If you’re paying an annual 2 percent management fee and see a 6 percent return on your investment statement, the actual return was 8 percent because 2 percent was deducted to cover the fee. Every dollar you pay in management fees is subtracted from your return—therein lies the difference between gross and net return. The smallest change in the fee percentage can have an impact on your long-term savings. See for yourself.

Experts in the industry generally refer to the MER, which is the percentage of a fund’s assets used for administrative and other operating expenses. It also includes taxes. The MER is very useful, as it allows you to calculate the administrative and operating expenses within a fund you plan to invest in. “If you invest $100,000 in a managed fund and the MER is 2 percent, you will pay $2,000 in annual fees,”

A fee for every fund

Management fees are not the same for every product, and the percentage they represent varies according to different factors. “Among other things, it depends on the type of fund under consideration. For example, fees for a Canadian equity fund are steeper than those for a money market fund, because the equity fund is more complicated to manage and requires in-depth analyses. In other words, the more complex the management strategy, the higher the fees,” says Lafontaine.

The account manager’s style is another factor. Passive portfolio management, which consists in mimicking the investment holdings of a particular index, may be cheaper than active portfolio management. Finally, fund management companies that use brokerage firms to sell their funds must also pay for the firms’ services, which may impact their fees.