Regulators are about to Expose the True Cost of Owning Mutual Funds

If you own a mutual fund and don’t know its management expense ratio, what is the matter with you?

Well, we can’t blame you. I once owned funds before starting my career in finance and had no idea the cost either. At the time, I didn’t even think about it. The transaction history had no line items for costs, so I thought they were free.

Many have no idea what the true cost is to own a mutual fund, exchange traded fund (“ETF”), or segregated fund. If you’re one of the few people that has attempted to investigate the sum of the fees you’re paying, yet found those figures difficult to find, you’re not alone.

Embedded fees are those that are paid to the issuer of the fund. The fees run through the fund itself and therefore reduce the price of each unit you own. For that reason, it is hard to ascertain the true cost that a fundholder pays without digging through regulatory documents (which all of us have the time and interest to review, right?)

There are two calculations you should be aware about.

• First, the management expense ratio (“MER”) is the cost to manage the fund plus all other operating charges… divided by the value of the fund’s assets.
  
  
• Second, the trading expense ratio (“TER”) represents the trading costs… divided by the value of the fund’s assets.

Thank the dear Lord that regulatory changes were announced last month.

Under the new “total cost reporting” requirements, the kinds of funds mentioned above will be required to disclose the costs that are charged to fundholders in a far more transparent manner.

Starting in 2026 (well, actually, 2027 if you think about it because statements must comply to these new rules effective as of December 31, 2026), the cost as a percentage of the fund — as well as the actual dollars spent by the fundholder — will have to be written down and reported on a statement. Also, the sum of the MER and TER, which we defined above, will have to be added together and disclosed as the “fund expense ratio”.

If you manage a fund, there’s no need to wait until 2027 to start disclosing this to your clients. You should have shared this information the day your fund was launched.

Despite this legislation, investors would be better off selling their mutual funds and owning a customized portfolio. Here are the top 4 reasons why we don’t like mutual funds.

A report commissioned by Strategic Insight found that the cost of an actively managed mutual fund is 2.10% in Canada, 2.30% in the United States, and 1.99% in the United Kingdom. These fees are not directly tax deductible. If these numbers are a surprise, who can blame you – they’re difficult to find. Schneider & Pollock’s fees are directly tax deductible for all registered accounts.

1. They’re expensive.
   A report commissioned by Strategic Insight found that the cost of an actively managed mutual fund is 2.10% in Canada, 2.30% in the United States, and 1.99% in the United Kingdom. These fees are not directly tax deductible. If these numbers are a surprise, who can blame you – they’re difficult to find. Schneider & Pollock’s fees are directly tax deductible for all registered accounts.
   
   
2. They’re not customized.
   Mutual funds are one-size-fits-all. We talk to our clients all the time. Following our conversations, we regularly review each client’s portfolio to ensure that it makes sense to achieve their future goals.
   
   
3. No access to the person managing your money.
   Good luck getting a fund manager on the phone. If you do, what good will it do for you? We highly doubt he or she is going to make an adjustment to the investments owned within their fund based on your input.
   
   
4. You own the good, the bad, and the ugly.
   From personal experience researching these products, many funds own far too many positions. Once you exceed 30 securities, that is overkill to achieve adequate diversification. Many funds own significantly more securities than that, including stocks that we wouldn’t even bother to research due to very poor fundamentals. Some even charge a performance fee, which is a portion of your capital gains.

From personal experience researching these products, many funds own far too many positions. Once you exceed 30 securities, that is overkill to achieve adequate diversification. Many funds own significantly more securities than that, including stocks that we wouldn’t even bother to research due to very poor fundamentals. Some even charge a performance fee, which is a portion of your capital gains.

At Schneider & Pollock Wealth Management Inc., we are fee-based and charge a 0% performance fee. Our fees are tax deductible in non-registered accounts and are calculated on a tiered scale. This means that the more assets we manage, the more your fee is reduced as a percentage of total assets. Our monthly reports could not be more transparent – the transaction history lists every penny paid in fees and every dollar received in dividends and interest income.

Mutual fund managers need not wait until December 31, 2026, to fully disclose their fees to clients. They should have shared this information the day their funds were launched.