Warren MacKenzie wants you to pay attention to how much it costs to invest

Watch your MERs—and you could have five Cadillacs in retirement

Jana Schilder

Canadians would enjoy a more comfortable retirement if our same spirit of penny-pinching and coupon-clipping also extended to the Management Expense Ratios (MERs) of the mutual funds in our collective RRSPs.

Instead, we spend 10 minutes at the supermarket trying to save 67 cents. Small potatoes stuff.

The MER is how much mutual fund companies and sales agents charge investors to participate in the fund, and is payable whether the fund makes—or even loses—money.

“Many people don’t really understand what a 2.5 per cent MER actually costs them, year after year, over the lifespan of their investment portfolio,” says Warren MacKenzie, president and CEO of Weigh House Investor Services, a company that provides fee-based independent reviews of investment portfolios.

And Canada reportedly has the highest MERs in the world. The average MER is 2.33 per cent of the 2,200 mutual funds that are tracked by the Investment Funds Institute of Canada (IFIC). Pure equity mutual funds tend to have the highest MERs of all.

Over a 20-year span, the annual MER could end up being a pretty big cash drain, explains MacKenzie.

How big a cash drain?

Imagine two individuals, each aged 45 and starting off with $100,000 in their RRSPs. Each makes the maximum RRSP contributions of $22,450 on their earnings of $125,000, until age 65.

Here’s the important difference, one individual invests in ETFs and the other in balanced funds.

Over the past five years, the actual difference between the net returns from the five largest Canadian balanced funds and the equivalent asset mix in two ETFs was 1.52 per cent. The average MER of the five balanced mutual funds was 1.76 per cent.

If the gross return is the same, but the individual using ETFs cuts the MER by about 1.5 per cent, the difference would be about $250,000 at retirement.

“Continue improving your return by 1.5 per cent annually and you could afford five new Cadillacs during your retirement,” says MacKenzie.

“Or, you could use that $250,000 to buy a vacation home. Or, if health care is a worry, this would be enough to cover the cost of 24-hour home care for five years. Or, you could fund your grandchildren’s university education,” says Mackenzie.

While some Canadians have caught on to the actual costs of MERs, Canadians still buy a lot of mutual funds.

Canadians held a total of $619.7 billion in more than 47 million mutual fund accounts at the end of November 2010, according to IFIC. Of those, about 79 per cent are held in registered accounts, such as RRSPs and RRIFs. More important, 85 per cent of mutual fund owners continue to use a full-service advisor, says IFIC.  

Warren MacKenzie






Warren MacKenzie is the president of
Weigh House Investor Services, in Toronto

Each quarter, Standard & Poor’s evaluates mutual fund performance, issuing the SPIVA report. The majority or near majority of funds in a particular category (such as equity, bond, balanced, and so on) delivered returns that short of the index used to gauge their performance. The goal of “beating the index” is normally missed.

Here’s the critical part:  in any 10-year window, 95 per cent of mutual fund managers don’t beat the index, says MacKenzie.

So, what are better options for Canadian investors?

You can stick with mutual funds;  shop around and buy carefully. If you have millions to invest, you can negotiate on the MER. 

Canadian banks now have mutual funds with low MERs that investors can buy through the bank’s discount brokerage arm.

RBC Direct Investing offers about 40 “Series D” mutual funds with MERs starting from 0.50 per cent up to 1.44 per cent. Fund categories include:  equity, income, money market, balanced, and growth funds.

Over at TD Waterhouse Discount Brokerage, investors can buy the “e-Series” mutual funds, which are index funds meaning your return is the same as the index. TD offers about a dozen different “e-Series” funds, in four categories:  fixed income, Canadian equity, U.S. equity, and global equity funds. MERs range from 0.31 per cent to 0.48 per cent.

Exchange Traded Funds (ETFs) are another popular option to lower your MER. An ETF is an investment fund, comprised of stocks or bonds, that trades on stock exchanges, much like equities. Most ETFs track indexes, but recently there are also some actively managed ETFs. Firms that offer ETFs include Claymore, Vanguard, iShares, and Horizons BetaPro.

But wait! You’re not in the clear yet.

While it’s true that ETFs have lower MERs, largely because they are passively managed, there may be additional transaction costs.

Asking your full-service advisor which ETF to buy may put you in the fee-for-service category. Sometimes, the amount of the ETF could be a factor:  your full-service advisor could charge you from $100, $250, or more. Buying an ETF through a discount broker is cheaper, but that doesn’t include investment advice.

“When you’re looking at MERs, make sure you know what is included. Is advice included? If the MER is substantially lower, what is excluded?” says Dennis Yanchus, Manager, Statistics & Research, IFIC.


This story originally ran in The Toronto Star, in a special investing section.