How Mutual Fund Fee's Work

Geoff Cook - CFP, CHAIP

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Investing Barrie

Mutual Funds have become a real point of contention in the media in the last few years. I recently watched a “CBC Market Place” report where a woman went to several financial institutions and asked “how do the fees with mutual funds work?”.

I was both shocked and amazed with how difficult this question was for these professionals to answer, and since then I’ve noticed from reading several articles and blog posts that these professionals and this client was not alone. To see the video - Click Here

So I would like to clear the fog and put it all out there.

First thing that is very important to understand is that Mutual Fund Fees are directly related to how investment advisors, and investment managers get paid. “How we get paid/Our business model” is really a conversation that needs to be had early in your financial advisor relationship. This should be done in your first meeting and be re-iterated in your letter of engagement.

It is also important to understand that depending on the structure of the financial advisors business model, there is a few different ways that you can be charged.

I will do my best to explain the most common ways mutual funds are set up. If you would like clarification, please don’t hesitate to ask.

Other versions – To keep things simple…I am going to share a few core examples. There are other structures out there that are derivatives of my examples that benefit different situations like non-registered money, and used often with higher value account sizes. To see a great further explanation on the variety of these structures- Click Here

There are two types of fees that can be associated with mutual funds – Sales Fees and Management Fees.

Let’s use a very simple example. You have decided that you want to invest your $100,000 in XYZ Equity Fund. Next step is to decide how this account will be managed based on the model of the advisor.

Mutual Fund Sales Fees

Now that we have decided on what you want to invest your $100,000 in, we now need to decide how to structure sales fees. Sales fees are directly related to how the advisor will get paid up front on the transaction.

Option 1 –Back End Load/ Deferred Sales Charge and Low Load (DSC, LL)

In the back end load structure, the fund company will pay the commission dollars to the advisor. The client will then have to pay a fee if they sell and withdraw your money from that fund company within a certain period of time. This varies from company to company, but let me give an example.

Back End Load – Sales Fee Schedule


Sales Fee















So again…You have invested your $100,000 in XYZ Equity Fund, and if you decide to sell and pull your money out of the fund company you will have to pay a sales charge. If you removed your funds in year 5 for example the fee would be $4,000 (4% of $100,000). You can switch funds within the family without incurring fees. This means you could switch from XYZ Equity fund to XYZ Dividend Fund with no fee.

The rational for this fee is because when a purchase is made using the Back End Load structure the Fund Company pays a commission to the Investment Dealer of usually 5%. So the fund company says..

“We paid these people a commission for your business…If you decide to leave within a period of time, we want that commission back”

There is also something called ‘Low Load” which is the same concept but with a shorter time frame, and less fees. Here is an example of a Low Load Structure;


Sales Fee

First 18 months


Between 19 and 36 months




Low Load works the same way…The Fund Company pays the investment dealer a commission typically of 3% and if the client sells, they want to recoup that commission.

Option 2 – Front End Load (FEL)

Now you can also set up a Front End Load fee. In a front end load the advisor charges the client directly the commission up front typically anywhere from 0% - 5%. If you choose this method, the amount you deposit will be reduced by the fee amount.

For Example: If I charge a 3% FEL fee and you invest your $100,000 in XYZ Equity fund – You would only actually end up investing $97,000 (3% of $100,000).

In this structure there is no other fee if you sell and remove your money from the fund company. You paid the commission directly to the investment advisor, so the fund company will not need to recoup the commission.

Now…Not to add a level of confusion here…But there is one more component that works in the clients best interest if they have chosen the Back End or Low Load structure. Every year you are able to “Free Up 10%” of your fund units and move them to the Front End Load structure, thus eliminating any sales fees on those units.

Using our above example…After year 1 – You could take $10,000 out of back end load and hold the same investment in the front end load version. In year two you could move another 10%.

Mutual Fund Management Fees (MER)

Mutual Fund Management Fees are used to compensate the Fund Company, The Fund Manager, and the Investment Advisor on an ongoing basis for managing, and servicing your account/s.

Whether a client uses front end or back end structure there is typically a service fee or “trailer fee” paid to the advisor. The commission to the advisor is less for Back End Load then Front End Load and ranges from 0% - 1% paid to the dealer depending on the type of investment, Fund Company, etc.

Some of the services that are included in the MER’s range from company to company but in general are the following;

Mutual Fund Company Costs

- Administration Costs
- Trading Expenses
- Portfolio Manager compensation
- Reporting
- Etc.

Advisor Services

- Investment Advice
- Investment Due Diligence
- Tax Planning
- Financial Planning
- Estate Planning
- Retirement Planning
- Portfolio Management
- Economic Research
- Etc.

How MERs are calculated

The MER is calculated daily based on the value of your account.

The formula is - (Account Balance) x (MER) / 365 days

For example - $100,000 x 2%/365 = $5.48

Hypothetically if your manager generated the same return daily as your daily MER at the end of the year your MER cost for the year would be $2000.

This calculation is made daily. If your account drops in value – the fund company and investment advisors pay is dropped and conversely if your account goes up in value the commission increases.

When you look up a mutual fund most of the time performance numbers are posted after fees. So if you see that the mutual fund had an annual return of 8% and an MER of 2% - That means the annual return was 10% (-) 2% MER = 8% net return to the investor.

The MER does allow your fund manager and investment advisor to have a vested interest in the value of your account vs. just charging a flat fee for managing an account. The reason being, if your investment account drops by 50% than the compensation to the professionals also drops 50%.

There is a great calculator on Canada’s Investor Education Website “” that allows you to choose a fund and see the impact. To see the calculator - Click Here

Performance Fees

Certain fund companies (typically Hedge Fund companies) will also charge what’s called a Performance Fee.

This performance fee is intended to further align the interests of the manager with the investor and allow a higher compensation for higher returns. The way a performance fee typically works is the following;

You pay a flat MER and the manager will charge a percentage of outperformance based on a certain benchmark. There is several different formulas for doing this but allow me to share a common example.

2 and 20 – One of the traditional formulas was to charge a flat 2% fee and then 20% of the outperformance of the index.

So let’s say the fund invested in US and Canadian Equities the benchmark might be a 50/50 mix of the S&P 500 and the TSX.

If the fund returned 15% and the blended index returned 10% - The fund companies MER would increase based on the additional 5% of return the company returned over 10%. In other words…they would charge your account a 20% fee on the additional 5% return.

There has been a lot of flak about mutual funds over the years and I can totally understand. A huge issue in this day and age is financial literacy, and quite frankly I don’t believe many investors are being educated about how these things work.

Mutual Funds are not for everybody, and further to that there is somewhere in the neighbourhood of 10,000 mutual funds in Canada most of which add no value to investors (adding performance or reducing risk). It is important to decide what makes the most sense for you, and determine if your Financial Planner/Financial Advisor is getting paid in a way that you feel comfortable with. If their compensation is all derived from mutual fund commissions, it is important that they are providing enough value to your relationship to justify the cost to you.

Again, in this post I have tried my best to keep things clean and simple. There are other derivatives of fund fees and compensation out there. Hopefully your advisor will discuss these different structures with you, especially when it is relevant and in your best interest to utilize. For more information visit this link - Click Here


Infinite Financial is an independently owned and operated Financial Services company in Barrie, Ontario. We specialize in Life Insurance, Retirement Planning and Estate Planning.

Our Certified Financial Planners represent the major Banks, Investment, and Life Insurance companies in Canada. We pride ourselves in offering advice independent of any particular Life Insurance, Bank or Investment firm and based strictly on client’s needs.

Contact us today or stop by our office in Barrie to say Hello!

Infinite Financial places mutual fund transactions through Banwell Financial Inc. and Life Insurance transactions through Bridgeforce. To learn more about these relationships - click here

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