In response to a long-running debate on the merits of the Smith Manoeuvre, a financial planner made the following comment:
The best portfolio is a diversified portfolio, MER be damned.
The MER (or management expense ratio) refers to the management fees, trailer fees paid to your investment advisors, administration charges and GST. MER is reported as a percentage of assets under management for the previous financial year and could vary from year to year.
While the returns advertised by mutual funds already account for the MER, investors should still pay attention to how much fees they are paying because a higher MER does not mean a better product. In fact, many studies have demonstrated the opposite: the lower a fund’s fee, the better its odds of posting future returns that are better than average. As John Bogle likes to say: “in mutual funds you don’t get what you pay for. You get what you don’t pay for”.
The next time you are investing in a mutual fund, picking the one with the cheapest MER in its class will increase your odds of success. Better yet, you could simply pick the cheapest index fund.