NB: I blundered on this one. After a commenter pointed out my blunder, I re-worded this to make its assumptions a little more correct and less flawed.
Would we care if ETFs, Mutual Funds, Index Funds and such had to publish the fund’s growth before it took their management fees? I would, however, since many folks don’t seem to connect these two concepts, maybe they need helpful tables or graphics.
Would you notice if you saw the following table (which makes some naive assumptions about growth being static over 25 years but is supplied as a simple example (also doesn’t include purchase and selling fees as well):
| MER | 2.44% | |||
| Actual Growth Avg | 3.89% | |||
| Static Growth Model | ||||
| Fund Size | Growth | MER | Real Growth | Year End |
| $10,000.00 | $389.00 | $253.39 | 1 | |
| $10,135.61 | $394.28 | $256.82 | 1.36% | 2 |
| $10,273.06 | $399.62 | $260.31 | 1.36% | 3 |
| $10,412.38 | $405.04 | $263.84 | 1.36% | 4 |
| $10,553.58 | $410.53 | $267.41 | 1.36% | 5 |
| $10,696.70 | $416.10 | $271.04 | 1.36% | 6 |
| $10,841.76 | $421.74 | $274.72 | 1.36% | 7 |
| $10,988.79 | $427.46 | $278.44 | 1.36% | 8 |
| $11,137.81 | $433.26 | $282.22 | 1.36% | 9 |
| $11,288.86 | $439.14 | $286.05 | 1.36% | 10 |
| $11,441.95 | $445.09 | $289.92 | 1.36% | 11 |
| $11,597.11 | $451.13 | $293.86 | 1.36% | 12 |
| $11,754.38 | $457.25 | $297.84 | 1.36% | 13 |
| $11,913.79 | $463.45 | $301.88 | 1.36% | 14 |
| $12,075.35 | $469.73 | $305.97 | 1.36% | 15 |
| $12,239.11 | $476.10 | $310.12 | 1.36% | 16 |
| $12,405.09 | $482.56 | $314.33 | 1.36% | 17 |
| $12,573.32 | $489.10 | $318.59 | 1.36% | 18 |
| $12,743.83 | $495.73 | $322.91 | 1.36% | 19 |
| $12,916.65 | $502.46 | $327.29 | 1.36% | 20 |
| $13,091.81 | $509.27 | $331.73 | 1.36% | 21 |
| $13,269.35 | $516.18 | $336.23 | 1.36% | 22 |
| $13,449.30 | $523.18 | $340.79 | 1.36% | 23 |
| $13,631.69 | $530.27 | $345.41 | 1.36% | 24 |
| $13,816.55 | $537.46 | $350.09 | 1.36% | 25 |
| Totals | $11,485.14 | $7,481.22 | ||
So from this table what can we glean ?
- The model is overly simplistic in that:
- Growth is static
- MER is calculated on the Year End total (which may make it an overestimate, whereas normally MER is calculated every day of the year and added accordingly).
- From an initial investment of $10,000 after 25 years given the average actual growth and MER, we end up with $13,816.55
- Our Actual growth is $11,485.14, but the amount paid in MER $7,481.22, leaving us with a Net Growth of $3,816.55
- The Net growth as a percentage year over year is 1.36%Â (no I don’t think anyone would buy a fund with this crappy growth, but it’s a simple model).
- Management fees consume about 65% of the actual growth seen by the fund.
Is this helpful to investors? Would they see this? Would any investment firm publish this table? Maybe a graph would help? Would anyone want to know that they are paying almost $7500 in Management Fees on a $10,000 investment?
I have tried to explain this to a few folks, and I guess I am not very clear in my statements, because they mostly dismiss my statements as being either incorrect or inconclusive.
Like I commented on other sites, (including Michael’s above) I just like to thank everyone + anyone who brings up this issue and writes about it to get the word out.
From Michael’s “MERC”, to Preet’s MER calculator, Ken Kivenko’s columns in Moneysaver and the work of FAIR Canada. We need to beat these fee’s down and weed out the “direct selling” mutual fund industry as well. You haven’t mentioned anything here about SC’s or DSC’s, which would make your numbers far worse. Maybe” Chris” should have reminded you of that as well?
I have waged a small personal war at work with our high fee crappy funds in our group PP for the past 4 years. In then end I have some upper management understanding the issue but some key ones are stubborn and refuse to make changes – just “because”. I have been labeled a troublemaker just for asking for a review of our present provider and comparing them to what’s out there. I find it frustrating that 65+ people have to suffer unnecessary losses because a few people are brainwashed by our provider and refuse to open their minds. Maybe one day.
Yes, there are many other “admin fees” associated with a lot of funds that don’t fit under the MER “unmbrella” and thus scrape even more of your growth away.
Maybe one day folks will listen? Until then we can continue shouting at the storm.
There is a place for funds but with mers like that they should be outlawed. Mutual funds should have a cap on MERS like say 1%. Well I guess more and more got hip to the mer 2%+ fund scheme and the rise of the ETF. Even some etf,s are pretty damn shady as well like not paying out total dividends. Who can you trust these days with your money???? Not many, at least if you pick the wrong individual stock you made the mistake yourself and you learn from it but paying a fund to make all the mistakes on your behalf is just plain silly and negligent.
If I could find a fund that has an MER that is less than 10% of the Annual Growth (and it shrinks when they lose money in a year), I might go buy it, but I somehow doubt that really exists.
I think your example is incorrect, because in Canada mutual fund and ETF returns are reported net of fees. So the 3.89% return you quoted above is the return to the investor; the fund actually earned 6.33%. Still doesn’t make high MER funds a good idea, but it’s not as terrible as your example suggests.
I have adjusted my statements for clarity, and to reflect your correct statement that I was making an incorrect assumption, humblest of apologies on this one.
I find that people just can’t believe that more of your investment growth goes to the mutual fund manager and your advisor than goes to you. I had one person ask “if that’s true, why aren’t more people complaining?” The implication is that since my claim seems so extreme, it can’t be true.
It sounds a lot like the Global Warming deniers as well (yes I went there, next up, Mutual Funds are like Hitler)…