We hired the service of an investment firm to help with our portfolio and to educate ourselves along the way. Here are the results:
In conclusion, we are stuck in the mud and will be for a long time. This has nothing to do with my question but I had to get it off my chest. My question is: If a mutual fund is losing money (under achieving) does the fund manager still extract the MER out of the fund?
Expert Opinion:
The details you have provided in your question seem to require some comments. First, you indicated that you've lost 16% of your capital PLUS a 2.5% MER. Generally, if you have lost 16% on your portfolio, this would include the MER that had been charged to the funds internally by their managers. Second, you mention that you have paid $200 per year in general management fees to the firm. More than likely this is simply an administrative charge for holding a couple of RRSP accounts with them and is not part of any management fee charge. Third, you mention you cannot cash in the investments without being largely penalized. Likely this simply means that you have purchased what is referred to as deferred sales charge (DSC) mutual funds and as such, if you cashed in these funds, you would face an exit commission of 4% or 5%. To add insult to injury, many of these DSC exit costs are charged on the book value of the fund. In other words, if you purchased the fund originally in 1999 for $100 and it was now worth $84 and the exit commission payment was 4%, then the cost to exit would be $4 rather than $3.36.
To answer your question, yes the MER is charged on funds on an ongoing basis, regardless of performance or movement of the market. In Canada, it is very rare to find a fund or a portfolio manager who charges management costs on the basis of being paid only if their performance is above a certain level. Generally, such a participatory management structure would involve a very aggressive management style and often the fees would be dramatically higher than many other more conventional styles of management. It may be small consolation, but if the fund is generally underperforming for a long period of time, investors will withdraw their money from the fund or will simply avoid purchasing any new units of the fund and therefore the fund manager will find that their total management fees from this fund will be dramatically diminished due to a reduction in assets under management.
Your question does illustrate the pitfalls of purchasing deferred sales charge mutual funds and finding yourself locked into a structure that is uncomfortable at some point in the future. It can be expensive to exit these funds and staying in is not generally a very palatable solution either. There are some ways to manage the extraction from these funds but they are difficult and can take time to implement. Unfortunately there is no easy way to avoid some cost of exiting these funds. The deferred sales charge mutual fund company generally pays your advisor 5% of the investment purchased up front and this amount somehow has to be paid back to the fund company through management fees over six or seven years or an exit cost if the fund is cashed in early.
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