What is a Good Management Expense Ratio (MER)?
In all your daily transactions, you’re used to being quoted a price and paying it. Whether you’re buying coffee, signing up for a streaming service or making a larger purchase like a car, you know how much you’re paying. However, this isn’t usually the case when you invest. Whether you’re investing online or through a local bank branch, you’re paying a fee and you may not be aware just how much it is.
Investment fees are often presented as a low percentage. They usually range between 0.1% and 2.5%. What appears to be a small number can have a significant impact on your financial success. If you’re charged a 2% annual fee on a $50,000 investment, you’re paying $1,000 a year in fees. This fee is called a management expense ratio (MER), and it’s charged on your total investment balance. The following table shows how much you’d pay annually, depending on how much you’ve invested and the MER.
Why you’re paying an MER
When you invest in an exchange-traded fund (ETF) or mutual fund, the provider will charge you an MER to select and bundle investments (e.g., stocks) together. The two main factors that determine whether you pay 0.1%, 2.5% or somewhere in between are:
Investment management
There are two ways a fund can select and bundle investments together for you.
Passively
They follow a set list of investments with minimal research and little buying or selling.
Most passively managed investments charge an MER between 0.1% and 0.5%.
Actively
They research individual investments and regularly buy and sell them.
Most actively managed investments charge an MER above 0.8%.
The MER goes to pay for analysts who research companies and all the overhead associated with running the business.
Advice and financial planning services
In addition to having investments bundled together for you, you may also be paying for advice and financial planning services. For instance, if you’ve purchased mutual funds through a bank branch, a portion of the MER you’re charged is paying for your advisor.
Most funds that are sold through a financial or investment advisor charge an additional 1% MER.
This fee provides you access to tailored advice and financial planning services. If you don’t need this or aren’t receiving it, then you should find a new investment solution.
What is a good MER?
In summary, if you’re paying for an actively managed fund at a bank branch where you receive support from a financial advisor or planner, you can expect to pay an MER of 1.8% or more. If you open a brokerage account and invest directly in a passively managed ETF, you can expect to pay an MER of roughly 0.25%.
There is evidence that most funds that actively manage your money perform worse than passive funds. It’s hard for fund managers to earn a high enough return to offset their additional fees on a regular basis. This is mostly because the stock market is so unpredictable.
The following table presents good MERs depending on your needs.
Closing remarks
Like any purchase you make, you’ll have the option to pay more for higher quality and additional features, or less for a simpler version. Spending more doesn’t always mean it’s better for your needs. The first step to finding a good MER is to decide how much support you’ll need. The more support, the more you’ll need to pay. You can use the above table to explore solutions that make sense for you and then research further to find the right provider.
If you’re not sure whether you’re paying too much for your investments, you can work with a fee-for-service financial planner to review your situation and receive guidance. If you’ve enjoyed this article, please consider subscribing to my email list in the footer to receive updates when new content is posted. If you know others who could benefit from the content throughout the site, please share the word, it’s much appreciated.