Management Expense Ratio: True Disclosure from CRM Phase 2

By Adam Laird on September 11, 2015

CRM2-CIOn July 15th, 2016, CRM Phase 2 will come into effect. Investment advisors and firms will be required to disclose annual reports of charges, compensation and performance. This is a positive change for investors, who are too often left in the dark by their investment advisors.

To learn more about CRM Phase 2, see our previous blogs and videos:

Management Fee vs. Management Expense Ratio

As an investor, when a mutual fund is purchased, the remaining cost to investigate is the Management Expense Ratio (MER), which is embedded in the return of the fund annually. The MER is comprised of fund expenses, such as management fees and operating fees. However, when reading through the prospectus, many investors can be confused by the difference of the management fee versus the management expense ratio:

Management Fee:

The management fee is the fee that encompasses all direct expenses incurred in managing the investments, such as hiring the portfolio manager and investment team. It does not cover the cost of buying or selling securities, which is a common misconception.

The management fee is significant when making the investment decision, as this is the cost of hiring and retaining the investment team and inherently is the most expensive part of managing a mutual fund.

Management Expense Ratio (MER):

The MER can be viewed as your total costs annually to be invested in the particular fund. The operating fees, such as buying and selling securities, as well as marketing costs, legal, auditing and filing costs, and other administrative costs are added to the aforementioned management fee to be total the MER.

Trailer Fees

Trailer fees are also embedded into the MER calculation. They are the fees paid to the advisor annually to “service” the client or ensure they are satisfied to stay invested in the fund.

There is no surprise that the trailer fee is 0.50% for those DSC funds that are locked in, versus 1.0% for the FE funds that have no lock in feature. This illustrates the desire for fund companies to pay the advisor to ensure the client does not leave.

As Glorianne Stromberg, former Ontario Securities Commissioner mentioned nearly 20 years ago:

“Sales representatives say that these fees are to compensate them for ongoing services that they provide to clients for such matters as answering inquiries about accounts, tax information, to monitor the performance, and other related matters… however no one monitors whether in fact these services have truthfully been provided.”

The debate of trailer fees will continue, especially after the disclosure in 2016. Many clients feel their investment advisors are salaried employees from the particular fund companies or investment brokerages. In 2016, they will truthfully see the direct and indirect fees that they compensate all parties and bring into question the value of service.

CRM 2 Gives Investors More Control

The investment fund industry is evolving to the ever-changing demands of the client. Investment advisors need to be paid for their services, as they are essential to govern and grow their client’s net worth.

After the CRM Phase 2 disclosure is truthfully digested, the advisory community and its business models will look drastically different. The well-informed and more cost-conscious client can expect a more valuable offering for their investable dollar and the advisors will need to accommodate their demands.

>> HighView Financial Group is an investment counselling firm that takes a fiduciary approach to affluent family and foundation wealth. We are transparent and accountable in all that we do. Schedule a complimentary discovery session to see if we’re the right investment stewardship counsellors for you.

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Adam Laird

As Vice President & Principal at HighView, Adam Laird focuses on advising high net worth families about wealth management. He is an expert in CRM2 and a champion of goals-based, transparent, and objective investment counselling.
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