Sunday, October 18, 2009

Hidden Mutual Fund Fees?

This is a Sunday feature looking back at selected articles from the early days of this blog before readership had ramped up. Enjoy.

Many people don’t like to talk about money, and so I try not to discuss money unless others show an interest. On a few occasions when the subject came up, I’ve encountered people who think that they don’t pay fees on their mutual fund investments.

In a recent case, an acquaintance who I’ll call Rosie offered her reason for believing this. Rosie said that she knew that some people paid fees, but she checked her statements regularly, and she had never seen any fees listed.

Of course she does pay the Management Expense Ratio (MER) and possibly front or back-end loads. I decided to have a look at some of my old statements from back in the days when I owned mutual funds. Sure enough, there weren’t any references to fees even though I know I paid them.

How widespread is the mistaken belief that investors don’t pay any fees on their mutual funds? I’d be very interested in the results of a poll. Among those who know they pay fees, it would be interesting to find out how much they think they pay.

Disclosure rules are supposed to prevent this sort of confusion. Each mutual fund has a document called a prospectus that discloses fees, and investors have to be given a copy of the prospectus. However, I suspect that people read the prospectus about as often as they read the 16-page manual that comes with a new toaster. (Do not use in bathtub. Do not sue us ...)

Maybe the disclosure rules need to be changed to require fees to be shown prominently on statements. This would be similar to the way that credit card statements have to include information about the amount of interest charged and the interest rate.

Because MERs are so high in Canada, let’s take a Canadian example. Suppose that Howard and Cindy are in the early fifties and have been saving in their retirement savings plans (RRSPs). As of a year ago, between them they had $200,000 split across the three biggest actively-managed Canadian equity mutual funds. (The following figures are based on real fund results.)

Here is the summary part of their collective investments including a fee disclosure that doesn’t normally appear on statements:

Total Assets one year ago:

Total Assets now:

Total investment return over the past year:

This investment return takes into account the following MER fees paid:

Howard and Cindy would definitely pay more attention to the exorbitant fees charged by mutual funds if they were disclosed this way. Switching to index funds would save Howard and Cindy about $4000 per year in MER fees.

Don’t hold your breath waiting for this kind of disclosure. There would be huge opposition to it from the mutual fund industry.


  1. I wonder about the state of the mutual fund industry. Mainstream magazines now trumpet the efficiency of ETFs. When I started investing back in the 90s, most people were willing to pay 2.5-3.5% for returns of 20% per year.

    I don't expect that there has been a huge rush out of traditional mutual funds, but there will be fewer new investors into mutual funds.

    People who have been mutual fund investors for a long time have built a relationship with their dealers and are not all that likely to abandon their dealers. As you wrote in a recent post, people tend to make financial decisions based more upon trust and relationships than cold, hard logic about cold, hard cash.

  2. I just looked at my statements. They do include an item for fees, but now that I look at it, it seems to be less than half of what I thought it should be. I wonder if they consider "fees" do be only one part of the "MER".

  3. Patrick: The only fund statements I ever received that showed fees explicitly were for company savings plans where an insurance company took an extra fee on top of the MERs of the funds. The MERs weren't shown, but the extra insurance company percentage was shown, sort of. This fee was extracted as a number of units rather than dollars, and appeared on a page with a blur of other confusing numbers. I was determined to figure all this out, but I doubt that many other employees bothered.