Management Expense Ratio (MER)
Each fund pays its own operating expenses, including legal, accounting, and management expenses. The MER is the total of all expenses expressed as a percentage of the fund’s value. For example, if a $100 million fund has $2 million in annual expenses, its MER is 2%. The higher the MER, the more you pay indirectly for management and administration. MERs may be high because the fund manager actively researches, trades, and manages the fund, and there are high operating costs, such as legal fees.
A trailing commission is paid by the fund company to the advisor or salesperson each year as long as the advisor’s client stays in the fund. The trailing commission comes out of the management fee, not out of your account, so you may not have noticed it. Since different fund companies pay different trailing commissions to advisors, it may influence the advisor’s investment recommendation.
A trailing commission ban for dealers that do not make a suitability determination, such as online trading platforms that allow investors to buy and sell their investments on their own, comes into effect on June 1, 2022.
Sales Charges or Front-End Load Charges
Paying a charge when you buy the fund is called an initial sales charge or front-end load charge. If you come across a fund without sales charges, be sure to compare other expenses, such as the MER.
Deferred Sales Charges or Back-End Load Charges
Some mutual funds only charge you when you sell, not when you buy. Deferred sales charges paid at the time of redemption decrease the longer that you hold the fund. They typically decrease to zero once you have held the fund for a required number of years, such as seven years. The risk with deferred sales charges is that you may end up paying significant fees if you need to redeem your investments earlier than the required number of years. So if you redeem early, you can end up paying more for the mutual fund.
New rules taking effect on June 1, 2022, will ban deferred sales charges. These rules prohibit investment fund companies from paying upfront sales commissions to dealer firms and their investment advisors.
Short-Term Trading Fees
If you sell a fund within a certain period, normally around 90 days, the fund will likely charge you. The purpose of this charge is to discourage investors from using mutual funds to make a quick profit by timing the market, and in the process decreasing the value of the fund.