Episode 31: Mutual Fund Costs

A potential disadvantage of mutual funds for investors may be the fund costs. A possible sales commission, or load, when buying or selling. Plus the ongoing management expense ratio charged to the mutual fund. These costs can significantly impact mutual fund performance. And investor wealth accumulation over time.

All that and more in Episode 31 on the Wilson Wealth Management YouTube channel.

“What is a mutual fund load?”

The “load” is the sales commission that may be charged when buying and/or selling a mutual fund (or other investment product).

Loads, or commissions, may come in a variety of forms. Front, back, or declining, are three common examples. We review the similarities and differences between these different types. And when one may make better sense for your own requirements.

“Are there any no-load funds?”

Not paying a sales commission to buy (or sell) a mutual fund seems like the smart move. There are many funds that do not charge loads when buying or selling the investment.

However, there are issues to watch out for when investing in no-load funds. The key one tends to be that the ongoing annual expense charges in the fund may differ between load and no-load offerings.

“How does ‘no-load’ differ from ‘no-transaction fee’ costs?”

No-load means you do not pay a sales commission when buying or selling. That commission would have been paid to the fund company.

No-transaction fee refers to the trading cost charged by the broker you use to buy or sell. Normally, investors trade directly through the fund company. With no transaction fees charged, only commissions.

Increasingly, banks and online brokers have developed relationships with certain fund companies. Allowing their clients to access mutual funds via the brokerage, rather than having to set up a new relationship with the fund company.

“What is a mutual fund’s ‘Management Expense Ratio’?”

The Management Expense Ratio (MER) is a separate cost from a sales commission.

The MER covers the ongoing costs of operating a mutual fund. Administration, marketing, trading.

The largest cost tends to be the fund management fees. For actively managed mutual funds, this will be the main component of the MER. For index funds, this should be zero.

There may also be continuous retrocessions, or “trailer-fees”, embedded in the MER. These are often paid to the fund salesperson who sold you the investment product.

What, you thought that “free” financial advice was free?

“How does this all work in the real world?”

We take a look at one the larger Canadian equity mutual funds.

How loads work. How they differ. How MER can vary between fund’s different share classes.

“What do most investors buy? Front, back, declining, or no-load funds?”

Over time, there has been clear trends in mutual fund investor buying patterns. In many areas.

As far as loads, the shift over time has been to no-load products from load products.

“Can you explain more on MERs? What does the data tell us on costs and investor trends?”

We review actual data on typical mutual fund costs.

Particularly, how MERs tend to correlate to the specific type of investment. In general, the more complex the fund, the higher the MER.

We also look at investor trends in seeking out lower cost mutual funds. Why this is the case.

“What lessons can I learn from mutual fund costs and investor behavior?”

There are many great lessons to learn from what is happening in the real world.

I think this point is important. Theory is great. But the key is seeing the empirical evidence.

I may tell you that investment costs are a key predictor of future fund success. That active asset managers do not beat their benchmarks on a consistent basis over time. Therefore, cost minimization is crucial to investing success. It sounds good. Makes sense to me.

But what about the real world, not the land of theory? Here, we can see that investors are making that shift based on the actual data. Not in a lemming or investment bubble crazed manner. In a consistent change over time as the lessons of low cost investing sink in.

This will be a focus moving forward. Why you should consider low-cost investments for your portfolio?

If you wish to read a little more on sales commissions and mutual fund expenses, please review “Mutual Funds: Transaction Costs” and “Mutual Funds: Operating Costs”.