Mutual Funds and Total Expense Ratio (TER) vs Management Expense Ratio (MER)

Management Expense Ratio (MER) is the overhead cost of running a mutual fund. It is required to be published by mutual fund companies in Canada, which is good since high cost mutual funds return less to the investor. In fact, the simplest way to shop for a mutual fund is just to find the one with the lowest fee since that is apparently an effective way to find the ones which will give an investor the best return.

But the MER doesn't include all costs as the Investment Funds Institute of Canada (IFIC, the mutual fund industry trade body in Canada) explains in this FAQ on fees. Some of those costs can substantial, further reducing returns to an investor.

Notable excluded costs are:

• brokerage commissions for trading; with turnover in funds up to 80% in a year, that can add up and reduce the performance of the fund (See The True Cost of Funds on Fundscope)
• sales charges, either front-load or deferred/back-end; actual performance for the investor is reduced to the extent that these charges apply - the front-load negative impact is obvious but it has been found that the deferred charges usually come into play since typical mutual fund investors apparently have short holding periods, averaging perhaps 3 years, while charges apply typically for six years.
• miscellaneous other charges, that may or may not be levied, such as RRSP admin fees, account opening fees, transfer out fees, short-term trading fees.
• trading impact costs aka the buy-sell spread, an opportunity cost, explained in The Hidden Costs of Mutual Funds by Milestone Investment Counsel
  

Note that yours truly discovered that the above IFIC FAQ said the direct opposite - that trading fees ARE included - but a phone call to the IFIC reached a certain Dennis, who said they are NOT included in the MER. He promised to correct the FAQ within the day. Hmmm, the document was dated 2005! Either no one reads the IFIC website or many people have been misled - not good. ... Update Friday, September 14th: The IFIC FAQ document still has not been updated to correct this error. Later on Friday, Dennis says the updated document will be posted next week. Update Oct.10 - the link to the IFIC FAQ doesn't work any longer. There has been a wholesale change to the IFIC website and the FAQ seems to have disappeared altogether. Better no information than wrong information, I suppose, but it isn't very helpful either way.

Nor are brokerage fees included in US published MERs, which are often called simply Expense Ratios. However, Total Expense Ratio does include include it - See this description of Total Expense Ratio in the Investopedia. In the UK TER also includes brokerage commissions and the information is usually published. Out with MER, bring on TER.

TIP: Reductions on Commissions for Sales of Leftover Stocks

Here's a tip that that a friend brought up recently which may benefit some out there. Ever been in the situation of having sold all your shares in a company only to discover some days later that a few shares have been credited to your account as a result of a Dividend Reinvestment purchase (DRIP) that you had forgotten about? Those shares may hardly be worth the sales commission. What to do? Phone up your broker, explain the situation and ask if they can give you a break on the sales commission. Sometimes they might give you a part or a complete reduction on the sale of such small odd lots that got there inadvertently.

UK Discount Brokers

The last task in the exercise to remodel the portfolio of a UK relative, described in yesterday's post, was to find an easy way and low cost way to purchase and administer the required new holdings of Exchange Traded Funds and OEICs. The list of factors I considered:

• account administration fees
• interest rate on cash balances as a minor factor due to the intended buy and hold strategy
  
• trading cost as a secondary factor since the intent is to buy and hold over the long term, and making purchases only to re-balance the portfolio once a year
• online trading and account access in a self-managed (no advice) relationship with the broker
  
• ability to hold ISAs, PEPs and regular with one company to simplify statements and facilitate transfers amongst accounts (since the move of investment funds into the tax-exempt ISA will take several years due to the annual £4000 contribution limit)
• account closure and transfer fees in case a change might be needed
• customer service - tested by phoning and asking for details; here there was a pronounced difference between the best and the worst (HSBC); another factor was the ease of finding info on their websites
  

In doing my investigation, all of it initiated through the Internet, one useful source for the traditional brokerage firms was the website of The Association of Private Client Investment Managers and Stockbrokers, which has a search / selection tool to narrow the list to brokers. However, it doesn't cover all possibilities - I discovered the Motley Fool and Etrade UK. Who knows there may be others.

The result came out in favour of Selftrade by a hair over E*trade and Motley Fool, which actually have lower trading fees of £8.95 and £10 per trade, respectively, vs Selftrade's £12.50. However, Selftrade has a single annual £25 account admin fee for any number of ISAs and PEPs, the lowest going and lower transfer out fees. Motley Fool pays nothing on cash balances and has higher transfer out fees while the killer for E*trade was poor customer service - being disconnected on one call, ring-no answer on another call and a long wait to finally get through on the third call. Selftrade phone answering was prompt, the phone triage menu tree short and the person who answered was knowledgable and patient. The big banks and brokerages like Barclays, Lloyds TSB and HSBC all were a bit more expensive on both trading and account admin fees.

If anyone has any experience, insights or other sources of info, your comments would be most welcome.

BMO Investorline Lowers Some Trading Fees

It's nice to read that discount BMO Investorline is lowering its equity trading fees to $9.95 per trade for all telephone or online automated trades as of March 31st on both Canadian and US exchanges. See http://www.bmoinvestorline.com/ProductsServices/5Star.html. That's a big drop from the existing $25 for market orders. Unfortunately, this applies only to what it calls Gold Star clients who have combined assets with BMO of $500k or more. Canada has for years lagged behind the US in low trading fees so maybe this is the start of a change that will extend to all clients. Anyone know if the other major discount brokers in Canada are following suit?