From MER to FER

In the evolving landscape of investment fund reporting, the Fund Expense Ratio (FER) will supersede the traditional Management Expense Ratio (MER) as the metric for assessing fund costs.

This shift is intended to enhance transparency and provide investors with a more accurate understanding of the total expenses associated with their investments that they are already paying.

A detailed view of the fees included in the FER

The FER is the percentage of a fund’s assets used for operating expenses. It includes two main parts: Management Expense Ratio (MER), covering management fees and operating costs, and Trading Expense Ratio (TER), reflecting costs from trading securities within the fund.

MER Explained

Management and performance fees

Account for the largest portion of the MER. These are charged for investment, research, risk management, oversight and advice. They also include the salaries of the fund manager(s) or advisor and support staff. 

Trailer Fee

When present, it is an ongoing fee paid by investment fund managers to financial advisors or dealer firms. It serves as compensation for the continuous service, advice, and portfolio monitoring provided to clients over time.

For advisors on fee-based platforms, trailing commissions are not paid by fund manager; instead, the advisor’s firm charges a transparent, direct fee to the investor for service and advice.

Operating expenses

Include routine expenses such as record keeping, securities custody services, as well as legal, accounting and auditing fees. They also include reporting and prospectus fees, banking charges (such as interest paid when a fund uses leverage) and administration fees of underlying funds.

Taxes

Are payable to the federal and provincial governments. They’re applied to management and administration fees based on the fund holder’s place of residence. When there is a change on the proportion of clients in each province, the impact can be seen in the updated MER.

TER Explained

The TER reflects the costs when a fund’s portfolio manager buys and sells securities within its portfolio.  It also includes some derivative costs such as swap cost, when they are used.

It also include some derivative costs such as swap cost, when they are used.

Calculation

The TER is calculated by dividing the fund’s total annual trading costs by its total assets

Impact

Since the TERs typically applies to equity trades, balanced funds tend to have lower TER than equity funds. Funds with more frequent trading activity tend to have higher TERs.

Fixed-income funds do not typically report a TER since the bond trading commissions are already included in bond prices.

Example of FER for some NBI Funds:

Does that mean there are more fees?

• Not more fees, just more transparency.
• FER does not introduce new charges; it simply includes costs that were already part of the fund but not shown in MER. By adding trading expenses (TER), FER gives clients a clearer picture of the total cost of investing.

Understanding fund expense daily cost calculation

Dealers, portfolio managers, and insurers must report the total annual fund expenses for all investment funds held by a client, working with investment fund managers (IFMs) to calculate the Daily Cost Factor:

• The Daily Cost Factor is calculated by multiplying the FER by the funds market value.
• IFMs report the FER, which includes MER and TER, at least twice yearly.
• If FER data is missing, the previous value is used until updated.
• New funds report costs once sufficient data is available; statements note any missing data.
• All reporting follows strict accuracy and transparency controls.

With increased transparency in investing, reporting fund costs has moved from MER to FER. The FER includes both management and trading expenses, which provides a more comprehensive overview of total investing costs. This reporting approach aims to give investors additional information for decision-making and enables advisors to communicate costs more precisely. With standardized reporting tools such as the Daily Cost Factor and CRM3 disclosures, the FER seeks to ensure that investors, advisors, and fund managers have a consistent understanding of fund expenses. This development is intended to increase visibility and accountability of existing costs, rather than introduce new fees.

For answers to your questions on CRM3 and total cost reporting, check out:  The most frequently asked questions about CRM3

For more information on how to engage in discussions with investors on the topic of CRM3:  5 Lessons learned from CRM2 on fees with clients.