Watch your MERs—and you could have five Cadillacs in retirement
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
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.
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.
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.
20-year span, the annual MER could end up being a pretty big
cash drain, explains MacKenzie.
How big a cash drain?
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.
important difference, one individual invests in ETFs and the
other in balanced funds.
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.
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
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.
Canadians have caught on to the actual costs of MERs, Canadians
still buy a lot of mutual funds.
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.