Stock and Mutual Fund Account Transaction and Management Fees

The expense of buying into and maintaining ownership in a mutual fund account is an important consideration; one that an investor must weigh carefully before choosing which mutual fund option they will invest in.

A mutual fund is basically a collection of stocks and/or bonds managed by a mutual fund manager. Each person that invests in a particular mutual fund becomes the owner of their share of the stocks involved. In theory, mutual funds should be a sound investment… after all, your money is being managed by a professional, right?

The trouble with mutual funds lies in the many types of fees that may apply. Understand these fees and ask questions; if your fees are going to eat into a substantial portion of your return, you will need to think twice about your investment choice.

Transaction fees vary considerably depending on the mutual fund you choose, who is managing it and how often you carry out transactions. Those who buy and sell their individual stocks on the open market will pay a fee to their brokerage each time – more buying and selling means more transaction fees. Mutual funds are no different. Each time you buy or sell shares within the fund, you will pay a transaction fee. A mutual fund investor also pays an annual fee or ongoing fees to keep them invested in the fund.

The Management Expense Ratio, or MER, is an important figure to understand. This number represents the expense ratio of the fund; that is, the percentage of the overall value of the fund that goes directly towards its operation. These fees vary widely between funds, but on average range from 0.2% to 2% of the total value of the fund. Although this fee is not paid directly out of your account, it comes off of the top of the value of the fund, reducing your potential return.

This includes between 0.5% and 1% (of the total fund value) to pay the fund manager. 1% sounds reasonable, until you do the math. Does your mutual fund manager really deserve $500 000 for managing a mid-sized $500 Million fund? Administrative expenses are also worked into the MER, but you might be surprised at what you are paying for. While necessities such as postage, customer service and office supplies apply, some companies also work their cappuccino machines, leather furniture and other luxury items into their administrative fees.

Other fees that might apply within the MER are legal, custodial, audit, report, prospectus and more. Index and money market funds typically see the lowest fees, while actively managed sector and specialty funds are amongst the highest.

The best policy for investors is to understand what you are paying for. The best paid mutual fund managers aren’t necessarily the best at their job; examine your fund, manager and fees carefully before making any investment.