Since the MER is a ratio, it’s expressed as a percentage, and it reflects how much of the entire mutual fund holdings are deducted annually to cover the operating expenses of the fund. Canadians have long suffered under shockingly high fees with average mutual fund MERs over 2%, the highest in any developed market. D'oh Canada!
To arrive at the MER, you add up a large hodgepodge of expenses, like the salaries of the fund manager and staff, fees to pay the dealer where you bought the investment, office expenses (copier toner and Post-Its are on you!) not to mention taxes, like the Harmonized Sales Tax. MER is a stealthy bugger since you’ll never see the dollar amount removed from your account as a transaction; rather it is excised from the average annual value of the fund, which directly affects the fund price. CRM2 reporting requirements do not require disclosure of investment manager compensation, so MER provides a more thorough accounting of your total fees.
It is largely because of the eroding effect of MERs that research consistently shows that actively managed funds by and large do not outperform passive investments. It makes perfect sense: even with great financial minds managing a fund, it’s exceedingly difficult to outperform the market if you need to increase a fund’s value by 2% just to break even. Vanguard, one of the pioneers of passive investing, demonstrates here how a 2% MER over 25 years can shave $170,000 off of your gains, had you paid no expenses at all. If you can believe it, this doesn’t even capture the full picture of all the mutual fund related fees you’re on the hook to pay as an investor: the MER doesn’t even include trading costs (how much the fund pays to trade one investment for another.) Some funds will also charge front or back end “loads,” a fancy term for sales commissions.