Investing is uncertain, nothing is truly guaranteed. Except Fees. The four letter F-word that we should all be extremely careful with.

Whether your portfolio generates outsized returns or you lose your shirt, the financial industry is very adept at ensuring they get paid… regardless of what happens to you. And if you don’t notice or understand what you are being charged, even better for them.

Fees are not inherently bad, they provide compensation for institutions and advisors that provide you with a service. The challenge is in understanding what is reasonable and knowing that you are getting good value for the fees you are paying.

Recent years have been very good for individual investors, as product innovation and competition has dramatically reduced the cost of investing. Some parts of the industry are still hanging on valiantly to the high-fee model that made them rich in prior decades, but the good news is that there is no reason for you to stay with them!

What is your MER?

One of the first questions I like to ask people is how much they are paying in fees. It is amazing how many people don’t have any idea, or even know where to look in order to find that information. Fortunately, Canadian regulations do mandate the disclosure of investment costs to customers, including in annual statements. So go and dig out that investment statement that you probably didn’t read!

Each mutual fund or ETF will publish a Management Expense Ratio (MER) for that fund. This will include costs for investment management, operating expenses and taxes, and trailing commissions (if you are unlucky). There is also a Trading Expense Ratio (TER), which is typically smaller and includes stock trading commissions. If you add the MER and the TER, you will get the total Fund Expense Ratio (FER), which is not currently typically published but will become a mandatory requirement for Canadian funds in 2026.

Investment performance reported by a fund should be net of the MER and TER, which are effectively baked into the product. You will not be sent an invoice for these costs, but you will see a lower overall return on a fund with high fees than an equivalent fund with low fees.

How much is too much?

If your investment fund’s MER is over 0.5%, then you are probably paying too much. Competition and innovation in the financial services industry in recent decades have driven costs down significantly across most asset classes. 2% or more used to be normal, but you can now invest in passive equity ETFs for as little as 0.05%!

Remember that the MER comes off the total balance you have invested, not the returns. So if the fund makes 6% in a given year, and charges a 2% MER, you will only see a 4% net return and they have taken 1/3 in fees. And if the fund loses 5%, you will actually see a 7% net reduction in your balance!

Some financial advisors will tell you that the fees don’t matter, but rather that you should focus on the ‘after-fee’ return of the fund they are trying to sell you. And they will point out one or more of their offerings that have ‘outperformed’ a benchmark or passive alternative over some time period, because their fund managers are simply that good. This is clever marketing, but misleading when you consider the huge number of products a fund provider has offered over that time period. Statistically there will always be a small number of funds that do better than average, but there will also be many more that didn’t (and they wont highlight the latter in a product brochure – in fact they will often quietly close down the poor performing funds).

Another common misunderstanding occurs when someone says “I just pay a flat fee to my investment advisor, and it looks like a reasonable amount”. It is possible that the mutual fund does not add a trailing commission to products sold by an independent advisor, who can charge you separately. But remember that you will always be paying ‘baked-in’ fees within a mutual fund or ETF, which are in addition to what is charged directly by an advisor.

Do fees matter?

“Compound interest is the eight wonder of the world.”

Albert Einstein

One of the secrets to successful investing is time. Returns compound over many years, and eventually you will be earning significant returns on the returns from prior years. The same principle applies for fees – small savings in fees can add up to a significant amount when compounded over a long time period.

To illustrate this, lets consider two people that invest $50,000 for a period of 20 years. The first puts the money in a low cost passive index fund that returns 7% per year, with an annual fee of 0.3% (for a net return of 6.7%). The second invests in an active mutual fund that returns the same 7% rate (a generous assumption given the track record of most active funds), and charges 2.0% in fees for a net return of 5.0%. At the end of the 20 years, the first will have $182,917 in their account and the second will only have $132,917. A 1.7% difference in fees cost the second investor $50k, resulting in 27% less money at the end of the day!

Check out this online fee calculator provided by the BC Securities Commission, to see the impact fees are having on your long term returns!