MER stands for Management Expense Ratio and it’s a number you can’t afford to not know. If you invest your money with a financial institution, chances are you have them invested in mutual funds and you’re paying a fee for these investments. You may not notice it because the MER is an indirect fee .The MER lowers your investment return by that percentage. For example, if the fund had a 6% return and MER is 2%, your net return is actually only 4%. Canada has one of the highest MER fees in the developed markets, at 2.42%.
How Does MER affect you?
In case you think paying 2% in investment fees is not a big deal because it sounds small, I urge you to rethink this. There are many alternate investment choices with much lower MERs that will save you a ton of money.
Let’s take a look at how lowering your MERs can make you a lot richer. Assuming an investment portfolio of $100,000 with average investment return of 5%
- 2.22% is the average mutual fund MER
- 1% is the cost of robo-advisors
- 0.5% is the cost of some index funds
- 0.33% is the cost of investing in TD E-series Index funds
These numbers are quite crazy. With 1.92% reduction in fees, after 25 years, you would be $129,993 richer. If you accumulated $300,000 in investments and paid 2.42% in MER, your portfolio will grow to $567,000 but with 0.33% in MER, it would grow to about $956,000! You would be $389,000 richer.
Try saving an extra $389,000 over the course of your lifetime. It is difficult. I hope after seeing these crazy numbers, that you will be more mindful about the fees you are paying and realize that not all the investment products your advisor recommends you is good for you.
For those of you who prefer a visual picture, here’s what it looks like:
Save $284,000 in fees for your financial advice
*Average Canadian Equity Mutual Fund charges 2.42% vs. low-fee investments fee at 0.5%
**Assumes $100,000 initial investment at 7% return