So why does your MER matter? Canada has the highest average management expense ratio in developed markets at 2.14%. For most of us, paying an average of just 2.14% for a mutual fund sounds like good value, but over your investment lifetime, those fees could up costing you tens of thousands of dollars, if not hundreds of thousands. That’s why you need to know what is a management expense ratio and how you can reduce it.

What is a management expense ratio?

A management expense ratio is a fee that investors need to pay to the investment provider for running certain investments such as mutual funds or exchange-traded funds (ETFs). A quick example would be if you invested in a mutual fund with a 2.5% expense ratio, your cost would be $25 for every $1,000 invested. Sounds pretty straightforward forward but it’s a little more complicated than that.

MERs usually consist of a few different things with the management fee for the portfolio manager usually being the largest fund expense. Since someone actually has to run the fund, that’s where the management fee comes in. What gets tricky is sometimes your advisor may tell you they get a very small percentage for their services; well that price is part of the larger management expense ratio that you pay which obviously adds up over time.

The MER also includes operating expenses such as transaction costs, office supplies, record keeping, administrative costs, legal fees etc. Although the MER covers most expenses, there can be separate fees that we pay such as front or back-end loaded funds which are commissions paid separately from the MER. This doesn’t apply to all funds so always ask for the details.

Management expense ratios are different from management fees. MERs are what the fund charge while other companies such as robo advisors may charge you another management fee on top of the MER. This management fee usually isn’t more than about .50%, but if you combine that with an index fund that charges a .50 MER, your total fees for that found would be 1%. That’s still much lower than mutual funds.

How does the management expense ratio affect me?

Some of us still believe that we’re getting value for paying a small percentage of our investments, but let’s take a look at how the MER eats into our returns. The following chart assumes the following:

• $100,000 initial investment
• $5,000 annual contribution
• 5% annual rate of return

Obviously, the lower your MER, the more money you have in the end. The MER percentages I’ve chosen are actually the average of the most common investments and are broken down as follows:

• 2.5% – Average mutual fund MER
• 1% – About the cost of using a robo-advisor or Tangerine investment funds
• .50% – About the cost of using TD e-Series index funds
• .20% – About the cost of a self-directed ETF portfolio

As mentioned, there are a few other costs associated, and if you’re a self-directed investor you will incur some trading fees so the above chart isn’t an exact science. The idea is to give us a general idea of why we should pay attention to our MER.

The difference between paying 2.5% and .20% MER over the course of 25 years would be $168,452.00 in our above scenario. Think about how far that money could go in our retirement years.

It’s also worth mentioning that the most expensive funds don’t necessarily mean you’ll get better returns for your funds’ investment portfolios.

When people see the potential savings, they start thinking about transferring their TFSA and RRSP.

How much am I paying?

Now let’s look at it strictly from a fee perspective. The following chart shows how much money we pay for our management expense ratio.

An average mutual fund will cost you $182,909.94 in 25 years, is that not insane? It’s impossible to get our MER down to zero, but you can see what a HUGE difference it makes on our bottom line. Most of our investment timelines last longer than 25 years, so by the time we retire we could have paid hundreds of thousands of dollars in fees if we stuck to regular mutual funds.

I’m not expecting everyone to become DIY-investors, but there are so many different options such as robo advisors and Tangerine investment funds, there’s no reason we can’t reduce our management ratio. Seriously, it’s so easy to transfer your RRSP to a robo advisor such as RBC InvestEase, Justwealth and Wealthsimple.

How do I find out my MER?

Every mutual fund and ETF has a prospectus available to potential shareholders that lists the MER. In addition, you’ll also find the following information on the prospectus:

• ​Fund name
• Portfolio manager names (if any)
• Fund’s assets
• Net asset values
• Summary of fund goals
• Historical data on the fund
• Distribution fees

The prospectus will give you a clear idea of what the funds’ goals are and how it’s performed since its inception. Note that the MER is automatically factored into the gains. For example, if the fund is showing a return of 5% in the last year, the MER has already been subtracted.

If you’re new to mutual funds and WTFs, a good place to start is Morningstar. They provide market research for investment products. You’ll quickly be able to research different equity funds, total fund assets, any transaction fees, and even what the administrative fee is for different brokers. 

Should you switch funds because of the MER?

Since mutual funds have an average expense ratio of 2% to 2.5%, you should definitely consider switching to funds with lower expense ratios. Better yet, switch to an ETF since there will be no sales charges or sales loads to pay.

There are so many all-in-one ETFs these days from reputable companies such as Vanguard that charge an MER of less than 0.50%. Why pay a high mutual fund expense ratio when you don’t have to? As I’ve already pointed out, the savings can be considerable. That said, you do need to do some basic research first to understand why buying index funds with a low MER is the ideal solution. You would also have to open an account with a discount brokerage so you can purchase the funds on your own. For reference, all of my investment accounts have a single ETF.

However, if you’re a high-net-worth individual who gets additional services from your financial advisor such as estate and tax planning, then the additional fees may be worth it. That said, if you’re getting those kinds of services, you’re probably better off paying a fee-only planner.

Final thoughts

I understand that the majority of people have no interest in managing their money, but I do believe most people would prefer to have more money when they retire. Now that you know what is a management expense ratio, don’t you want to start saving money? The purchases you make and a fund’s expense ratio can have a huge impact on your investment objectives. By reducing your fund fees, you could potentially increase your net worth.

Admittedly, Tangerine investment funds are more expensive compared to robo advisors or ETFs, but I still think they’re a great product. Keep reading my Tangerine investment funds review and find out why they may be a good fit for you.

What are index funds?

Index funds are funds where its holdings are meant to match a certain market index. Since an index comprises of the stock of thousands of companies, it allows an investor to be well diversified. There are many different indexes, but the Tangerine investment funds try to mimic the following indexes.

• FTSE TMX Canada Universe Bond Index – Canadian Bonds
• S&P/TSX 60 Index – Canadian Stocks
• S&P 500 Index – US Stocks
• MSCI EAFE (Europe, Australasia and Far East) Index – International Stocks

Don’t worry if you didn’t understand a word of the above, all you need to know is that index investing allows you to own the entire market as opposed to individual stocks. This benefits you as an investor since it has been proven that 80% of the time active management doesn’t beat the indexes.

It’s true that 20% of the time mutual funds do beat the index, but there’s no guarantee that you’ll be invested in the right fund. Plus past performance is not an indicator of future outcomes. Some investment advisors claim that their active style will guarantee returns or prevent any losses, but in reality, no one can predict the future.

Becoming an index investor over the years has become quite popular since people are starting to understand how fees can eat at your returns over time. For reference, all of Tangerine’s investment funds have a management expense ratio (MER) of 1.07%, whereas mutual funds charge an average MER of 2.5%. That’s a huge saving over your investment lifetime. Like tens if not hundreds of thousands of dollars.

There are five diversified portfolios available to investors with Tangerinewhich range from safe to risky. To find out which portfolio is right for you, you’ll be asked a series of questions to determine your investor profile before a recommendation is made. If you’re curious about how they all stack up, here’s my Tangerine investment funds review.

Tangerine Balanced Income Portfolio

• Fund code: INI210
• MER: 1.07%
• Risk Factor: Low

Of all the investment funds available from Tangerine, the Balanced Income Fund is the safest for investors since it has 70% in bonds. There is still some minor growth potential since 30% of your portfolio is invested in equities but this fund is aimed at people who aren’t looking for many risks.

New investors who may not be knowledgeable might lean towards a safe portfolio, but if you’re young, you really should be using a portfolio that has a higher allocation towards stocks. Even if the markets drop, you’ll have plenty of time to recover.

Tangerine Balanced Portfolio

• Fund code: INI220
• MER: 1.07%
• Risk Factor: Low – Moderate

As the name implies, the Balanced portfolio offers a balance between fixed income and equities. This will allow your portfolio to grow while still maintaining stability.

Traditionally, this portfolio would appeal to people who are in their 40’s as one rule of thumb is that the bonds in your portfolio should match your age. However, since people are living longer, and you could still be investing for 20+ years when you retire, this asset allocation is becoming a more popular choice for people in their 50’s or 60’s.

Tangerine Balanced Growth Portfolio

• Fund code: INI230
• MER: 1.07%
• Risk Factor: Moderate

With an even allocation between Canadian bonds, Canadian stocks, U.S. stocks, and International stocks, this is the perfect portfolio for investors in their 20’s and 30’s. You’re getting a lot of exposure to stocks so there’s a lot of potential for growth. This portfolio also has an equity allocation spread around the world so there’s no home base bias.

Tangerine Equity Growth Portfolio

• Fund code: INI240
• MER: 1.07%
• Risk Factor: Risky

This is Tangerine’s riskiest fund. There are no bonds to balance the fund out during down markets. Risky might be a loose term as it still makes sense for a lot of people.

Someone in their 20’s who has 40+ years to invest will likely have no problem starting with this portfolio. Alternatively, if you have a pension plan from work or you want to take a more aggressive approach in your TFSA, this portfolio could be a good choice.

Tangerine Dividend Portfolio

• Fund code: INI235
• MER: 1.07%
• Risk Factor: N/A

This is Tangerine’s ‘newest’ fund. It started in late November of 2016, so it doesn’t have much history. However, it tracks the MSCI Canada High Dividend Yield Index, the MSCI USA High Dividend Yield Index, and the MSCI EAFE High Dividend Yield Index which have been around for a while.

If you’re looking for a dividend paying Tangerine fund, this is the one for you. Distributions are paid out annually in December.

Tangerine investment funds review

PROS

• Low Management Expense Ratio (MER)
• No account or trading fees
• No minimum investment required.
• Auto Rebalancing

CONS

• Not the cheapest option (MER)
• Limited to 5 Investments funds
• Unable to modify asset allocation

The Tangerine investment funds are attractive to new investors since all you need to do is deposit your money and Tangerine will take care of everything. You can also set up an automatic saving plan with the funds, so you can just set it and forget it. There are no additional fees and you can purchase the Tangerine investment funds in your RRSP, TFSA, and regular account.

The recent change to the equity growth fund and the addition of the dividend portfolio has addressed the concerns of investors. All things considered, the 1.07% MER is reasonable for people who want to index without becoming a do-it-yourself investor.

How do Tangerine investment funds compare to others

If you invest on your own and use the Couch potato strategy, you could easily bring your MER down to .2% using ETFs or .5% with TD e-Series funds. These options require a little more work, but you get complete control over your asset allocation. You may end up paying trading and account fees, but the overall lower MER still make it worth your while. Basically, you could replicate the Tangerine investment funds at a fraction of the cost.

For many people, investing their own money is not something they’re interested in at all. Fortunately, robo advisors are a good option. Many of the top robo advisors in Canada including Justwealth, Wealthsimple, WealthBar (now CI Direct Investing), Nest Wealth and RBC InvestEase charge fees in the .50 -.90 range so if you invest with them, you could save a bit more on your MER. In addition, most of those robo advisors have a special promo where you can some of your portfolio managed for free when using my referral link.

If robo advisors are cheaper, then why do people use Tangerine investment funds? Well, since Tangerine is owned by Scotiabank, many people prefer to use them. They like to know that their money is with a major Canadian bank. The other obvious comparison is the new Tangerine ETFs which are Tangerine’s version of all-in-one ETFs.

I personally don’t think it matters if you DIY, use a robo advisor or Tangerine investment funds. They’re all good options since the fees you pay will be much lower than traditional mutual funds.

Final thoughts

All things considered, my Tangerine investment funds review is positive. If you’re looking for an easy way to invest but are not confident in becoming a DIY investor, then the Tangerine funds are a very good option. If you have an interest in investing and prefer a little more control over then go with TD e-Series, Questrade, or robo-advisors.

Remember you could always start with Tangerine and then switch later, the point is to start investing early and avoid high-cost mutual funds. If you want to start investing in the Tangerine investment funds, use my referral to open an account and start saving now. Even if you decide to go with a different company for your investments, don’t forget that Tangerine has one of the best rates for high interest savings accounts in Canada.

Personally, I think you’re better off reading a book and managing your finances on your own but I’m not going to argue with someone who wants to save now. If your portfolio is small, or you need someone to hold your hand, that’s okay, just be aware that there are questions to ask your financial advisor.

Ask the right questions

What’s your title/education ?

This may be hard to believe but there is no formal credentials required to call oneself a financial planner. That’s right, you could put financial planner on your business card right now, and it would totally be legal. That being said you still want to ask if your advisor has any professional designations, and what training they have.

What experience do you have?

We’ve already established that education and titles are irrelevant so experience is a bit more important. Find out how long your advisor has been working, and what companies they’ve worked for. Have they worked with clients that are in similar situations to you? If this is their first job or they recently changed careers, maybe they aren’t the right fit for you.

What are you licensed to sell?

As you can imagine someone who is only licensed to sell insurance products will push you hard on insurance. If they’re only licensed to sell mutual funds, then of course they’re going to sell you those. You want to make sure that your advisor is able to offer you a wide range of products, and can explain the pros and cons of each.

How do you get compensated?

I keep hating on bank salespeople, but to be fair banks, employ qualified financial planners that provide great service and advice. You want to find out how many clients they have, and what their average client size is. Ask them if their compensation is on an ongoing basis, or do they make up front commissions?

Advisors at the retail level usually get paid a straight salary or on an hourly rate; their main goal is to make a sale and move onto the next customer. If you’re going to purchase mutual funds through your bank, you might as well do it through one of their financial planners so at least you can get real advice.

[fusion_builder_container hundred_percent=”yes” overflow=”visible”][fusion_builder_row][fusion_builder_column type=”1_1″ background_position=”left top” background_color=”” border_size=”” border_color=”” border_style=”solid” spacing=”yes” background_image=”” background_repeat=”no-repeat” padding=”” margin_top=”0px” margin_bottom=”0px” class=”” id=”” animation_type=”” animation_speed=”0.3″ animation_direction=”left” hide_on_mobile=”no” center_content=”no” min_height=”none”][icon name=”share” class=””] Related: 6 Bank secrets to be aware of

What are the fees I’m paying?

All products carry a fee which is referred to the management expense ratio (MER), you want to find out exactly how much this MER is. Mutual funds average about 2-3% which doesn’t sound like a lot, but that’s a lot of money when you compound it over 30 years. You should also find out if there are any fees to be paid if you decide to pull out your funds early, this is referred to as a deferred sales charge.

What’s your approach to financial planning?

This is one of those questions to ask your financial advisor where you’ll probably not be satisfied with the answer. Retail advisors don’t specialize in taxation, insurance, investments, or anything really– they’re pretty much selling you whatever is popular at the moment. That being said, you still want to ask if the advisor is able to advise a plan, and how they plan to implement it.

What is your decision making process with my investments?

When working with someone at the retail level, you want to know how they are coming up with their recommendations, so ask. Do they have access tools, or do they make their decisions based on what the research team recommends? Are the funds all actively managed? Are there lower cost options? The reality is, you’re going to have limited choices.

[icon name=”share” class=””] Related: Signs your advisor doesn’t know anything

Final word

If you haven’t figured it out by now, advisors with banks and investment firms tend to have limited knowledge– they don’t have a required fiduciary duty. Financial planners however have an implied fiduciary duty so if given the choice, use their services. Regardless of who you decide to work with, the key is to start saving now and do your due diligence.[/fusion_builder_column][/fusion_builder_row][/fusion_builder_container]