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How management fees and the MER impact your savings

What you need to know about management fees and the management expense ratio to keep them from draining your savings.

By Fonds de solidarité FTQ

Do you know how much you're paying in investment management fees? Don't worry, you're not alone if you don't have the faintest idea! However, it's important to consider your management fees in your savings strategy, because every dollar you pay reduces your assets and, consequently, the net return on your investments.

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.

Total amount saved
Total paid fees
Note : Calculations are approximate and based on savings of $ 5,000 per year for 25 years, with an average annual gross rate of 6%.

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," says Sébastien Lafontaine, mutual fund advisor for FlexiFonds de solidarité FTQ. As the MER rises, so does its effect on your return.

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.

Repercussions on your assets

It's essential to do your research and compare products, as they can have a serious impact on your savings. A dollar paid is a dollar less for your savings goals.

"It's possible to let quite a bit of money slip away without realizing it. In the long term, this can really slow your progress toward your goals," says Lafontaine.

Why investment management fees matter

Mutual funds are subject to fixed or variable management and administrative fees. Fixed fees cover costs related to daily fund management, portfolio management, and marketing services, as well as commissions paid to mutual fund representatives, where applicable. They're calculated as a fixed percentage of the managed assets: 1 to 3 percent on average, and up to 5 percent.

Administrative fees cover legal expenses, bank charges, independent review committee expenses, prospectus printing and distribution costs, record-keeping expenses, and more. They usually represent 0.1 to 0.5 percent of the fund's net assets. In addition, operating costs (i.e., the fund's transaction fees) represent about 0.05 percent of net assets. Normally these fees are included in the management fees, as is the case with FlexiFonds.

In some cases, group savings plans like group RRSPs or mutual funds charge lower management fees due to the higher value of the fund, which can be beneficial to investors.

Reasonable fees

The MER for FlexiFonds funds is 1.5 percent. In addition, FlexiFonds mutual fund advisors are not paid on commission, which encourages them to offer neutral and objective advice. Furthermore, no fees are incurred when purchasing or exiting these funds. FlexiFonds administrative fees are fixed, and all transaction fees are included in the management fees.

How to find out how much you're paying

Be aware that management and operating fees are collected from the total value of the fund and don't always appear on your account statement. This makes them more difficult to evaluate, even if they do reduce the return on your investments.

The best way to get a clear view of your fees is to read the Fund Facts. In this document, you'll find information on the MER, the operating expense ratio, purchase and redemption fees, and trailer fees. This information can also be found in the fund's prospectus. The important thing is to do your research and compare the different products on the market.

The FlexiFonds offering

Created to provide our savers with a tailored and affordable service, the FlexiFonds offering can be accessed online or by phone, which helps reduce management fees. By primarily offering local investment products—such as Quebec government bonds, investments in local companies, or shares of Quebec companies listed on the stock market—the Fonds de solidarité FTQ aims to continue its mission to support the local economy.

It should also be noted that while higher fees may put more pressure on the fund manager, better returns are not guaranteed. "When it comes to fees, investors should ensure above all that they're getting the best value for their money. In other words, the goal is to maximize return and minimize risk," says Lafontaine. Always ask yourself whether the return is worth the fees.

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About FlexiFonds de solidarité FTQ

FlexiFonds de solidarité FTQ Inc. is a wholly-owned subsidiary of the Fonds de solidarité FTQ. FlexiFonds de solidarité FTQ Inc. acts as the principal distributor of the funds' units and is a mutual fund dealer registered with the Autorité des marchés financiers.