Although I have many complaints about the mutual fund industry, one of my biggest complaints is the lack of transparency. If you talk to most average investors, they are not even aware that they are paying any fees at all! I can only assume that these self-same investors must think that the financial advisors do their work for the good of society without getting paid.

Rob Carrick posted an article titled “TERs tell you the exact cost of owning a fund.” In this article, Rob goes over the MER - the management expense ratio. The MER basically tells you how much the fund pays for operational and managerial costs. But those aren’t all the costs.

What? There are more costs than the MER? But the MER is already so high! Yup. There are more costs. The brokerage expenses are missing. These are costs incurred when the fund buys and sells stocks. You didn’t think they did that for free, did you?

Welcome the TER - the trading expense ratio. The TER - just like the MER - will give the trading costs as a percentage. Now, to calculate the total amount of fees, you will add up both the MER and the TER. Rob gives an example:

“Let’s take the Acuity Income Trust Fund as an example. Its MER in 2005 was 2.75 per cent and its trading expense ratio was 0.29 per cent. Add up the two ratios and you have a fund where 3.04 per cent of the assets go to pay fees to investment advisers, operational costs, managerial costs and, of course, brokerage costs.”

The TER will be listed in both the annual and semi-annual fund performance reports provided by the individual fund companies.

Remember: Informed investors can make rational decisions.