Fees – An in depth look at the fees you may pay for your investments

From what you’re paying for to who and how much you’re paying, we cover everything investors need to know about fees.

When you invest in mutual funds there are two broad categories for the costs that are involved:

  1. Expense ratios
  2. Sales charges

There are also two different ways you can pay these costs:

  1. Commission-based
  2. Fee-based

At Assante First Avenue, our belief is that costs should be more transparent so it is easier for you to know:

  • What are you paying for?
  • Who are you paying it to?
  • How much are you paying for it?

It will be easier for you to know if you’re getting value for your money when this information is clear and visible.  What follows is a summary of the costs an investor is paying when they invest in mutual funds.

Some options are clear.  For other options you may be left guessing what you’re paying and to whom.

Mutual funds and the parties involved

When you invest in mutual funds there are three main parties involved:

  1. You, the client
  2. Your advisor
  3. The mutual fund manager

A mutual fund is a pool of money that is collected from many investors and is professionally managed by the mutual fund manager.  Each mutual fund has a specific investment objective.  The fund manager is responsible for implementing a strategy to achieve the fund’s investment objective.  Your advisor will analyze your own personal situation in order to recommend an appropriate mutual fund to meet your investment and financial planning goals.

There are many costs for the work your advisor and the fund manager do.  Let’s examine what you’re paying for and who you’re paying it to.

Expense ratios and the cost of operating a mutual fund

Expense ratios simply express costs as a percentage of the fund’s average net assets for a particular year.

Trading Expense Ratio

Some expense ratios are very straight forward such as the Trading Expense Ratio (TER).  The TER simply reflects the trading costs – all the buying and selling of individual securities within the fund.  In general, more active trading results in higher trading costs.

More active trading may also indirectly cost you more by triggering taxable transactions that the fund is required to pass-on to you.  Your Assante First Avenue advisor will help you understand if this applies to your situation, and will recommend adjustments so your investments are set up for maximum tax efficiency.

Management Expense Ratio

This is the big one that tends to get all the attention.  Technically speaking, the Management Expense Ratio (MER) consists of the following three parts:

  1. Operating expenses
  2. Taxes
  3. Management fee

Figure 1 illustrates the three parts and we’ll discuss each of these in turn.


Figure 1.  Expense ratios and what they pay for.

Operating expenses are an administrative cost to pay for things like regulatory filing fees, record keeping, custody fees, audit and legal fees, and the costs to prepare and distribute fund documents such as annual reports and prospectuses.

Taxes in this case is Harmonized Sales Tax (HST).  Mutual funds are required to pay HST on the administration and management fees that are charged to the fund.

The management fee is where things can get confusing for investors.  There are two parts:

  1. Fee paid to fund manager
  2. Trailing commission paid to your advisor

The fee paid to the fund manager is rather straight forward.  This part of the fee pays for the professional management of the fund – the manager’s strategy and ability to achieve the objective of the fund.

Simplistically, you can think of the TER, operating expenses, and taxes as the costs to run the fund that are passed on to you.  On the other hand, the portion of the management fee that goes to the fund manager is compensation for their creative work – implementing a strategy to achieve the fund’s objective.

The trailing commission is an ongoing fee that fund companies pay to your advisor.  This is your advisor’s compensation for the access, advice, and service they provide.

What’s not straight forward is how much of the management fee goes to the fund manager, and how much is going to the advisor.  This is because the trailing commission is a sub-component that is embedded within the MER.  It is buried away so you need to do some homework and ask in order to uncover it.

Before we show you an alternative, let’s take a quick look at sales charges.

Sales charges

Also referred to as a load, a sales charge may occur when you buy or sell mutual fund units.  The sales load is a commission to your advisor – the person selling you the mutual fund.  However, it is separate from the MER and should not be mistaken for the ongoing trailing commissions that make up part of the management fee.

Mutual funds are offered in the variety of sales charge structures listed below.  Figure 2 depicts these sales charge options, and what they each mean is explained in the section that follows.

  • No-load
  • Front-end load
  • Back-end load


FIGURE 2.  Sales charge options.  Sales charges are something you might be paying.


There is no sales charge.

Front-end load

This type of sales charge is paid up front at the time of purchase.  It is deducted from your initial investment and paid to your advisor right away.  It is expressed as a percentage of the amount you invest and ranges from 0% to 5%.

Back-end load

Here you don’t pay a sales charge at the time of purchase.  Instead, the fund company pays the sales charge to your advisor.  However, if you sell your mutual fund before a specified date you must pay a redemption fee to the fund company.

There are a couple types of back-end load funds:

  • Deferred sales charge (DSC)
  • Low-load

For DSC, initial sales charges tend to be very high, typically around 5% or even more.  The redemption fee rate shrinks to zero over a longer time frame, typically five to seven years.

If this sounds ugly to you, you’re not alone; DSC funds are now banned in Canada.  No new sales will be permitted using the DSC option.  DSC redemption schedules for sales made prior to the effective date of the ban will be allowed to run their course.

The sales charge for low-load funds diminishes a little quicker, typically two to three years.  And the initial cost is a bit lower, typically between 1% to 3%.

So far we’ve dug into the costs involved when you invest in mutual funds.  You are definitely paying a MER and a TER.  The TER and some of the MER is simply passing on operating expenses as the cost of doing business.  You might also be paying a sales charge.  Figure 3 puts the previous two illustrations together to show all the possible costs that you might be paying.

Figure 3.  The things you’re paying for and to whom.

What’s not clear is how much of the management fee goes to the fund manager, and how much is going to your advisor.  You can chose between two ways to pay these fees.  How much transparency you’ll have depends on which way you pay is chosen.

How you pay is what you see

What would be good is a transparent way to see exactly what you’re paying your advisor.  This way you can determine if you’re getting value for the money you’re paying.  Fee-based financial advice provides more transparency; commission-based advice shows you less.

Commission-based financial advice

In commission-based options the fund manager compensates your advisor by paying them using fund money first, before your rate of return is determined.  Your advisor’s ongoing compensation is embedded into the MER as pictured in Figure 4.  This makes it very difficult to see what you’re actually paying your advisor.


Figure 4.  Embedding advisor’s ongoing commissions into the MER reduces transparency.

Fee-based financial advice

Fee-based financial advice unbundles your advisor’s compensation and explicitly shows it to you on your account statement.  They do this by providing a category of mutual fund called “F class” that does not charge a trailing commission or a sales load.

For fee-based, the previous figure (Figure 3) about what you might be paying for simplifies to the illustration shown in Figure 5.



Figure 5.  Transparency resulting from a fee-based structure.

In addition to informing investors, more transparency has contributed to increasing competition among fund companies which has resulted in lower fees overall for everybody.

“Unbundling:  The move towards fee-based financial advice has spurred the demand for lower-cost funds…  Institutions and advisers have increasingly opted against costlier share classes that embed advice and distribution fees.  The growth of ‘F class’ shares in Canada is a notable example1.”

A misconception that often arises among investors is that they are paying more in a fee-based compensation arrangement.  After all, there’s a charge on your account statement whereas in a commission-based arrangement there is no such charge.  The following figure clarifies the difference.

In a commission-based arrangement you may not see a charge, but you are paying the trailing commission off-the-top before your rate of return is determined.

Figure 5.  How you’re paying – to see or not to see.

Commission-based arrangements obscure an investor from knowing how much of the total fees they pay are going to the advisor, when compared to the transparency of a fee-based structure.  This makes it very difficult to know if you’re getting value for what you’re paying for.

Fee-based financial advice typically uses no-load funds.  Remember, no-load = no sales charge.  This leaves commission-based advice as the typical purveyors of load funds which have additional one-time commissions.

Knowledge is power – and in this case, value

It is important to note that commission-based financial advice by itself is not necessarily more costly.

However, we often find that a competitive fee-based structure will cost less for an investor compared to commission-based investing.

If you are unsure how to unpack all the details and tell for yourself, your Assante First Avenue advisor can evaluate your investments and identify the fees that you’re currently paying.

Informed with this knowledge, you will be able to make meaningful comparisons and determine if you’re receiving good value for your money.

1 Morningstar (2019).  Global Investor Experience Study:  Fees and Expenses.

The information mentioned in this article is for general information only. Commissions, trailing commissions, management fees and expenses, may all be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Please read the prospectus and consult your Assante Advisor before investing. Assante Capital Management Ltd. is a member of the Canadian Investor Protection Fund and is registered with the Investment Industry Regulatory Organization of Canada.