Understanding mutual fund fees in Canada (and how to manage them)

Sales charges, or "loads," are fees paid when buying or selling mutual fund units. These can be broken down into four main types:

• Front-End Load (Initial Sales Charge, ISC): Up to 5% of your investment, paid when buying units. This fee is negotiable with your advisor.
• Back-End Load (Deferred Sales Charge, DSC): Previously up to 6%, charged when selling units. The DSC fee decreases the longer you hold the fund. The DSC option is banned for new purchases as of June 1, 2022.
• Low Load (LSC): Similar to DSC but with lower fees (up to 3%) and shorter holding periods. Also banned as of June 1, 2022.
• No Load: No fee to buy or sell units, but it’s essential to compare the MER and fund performance before investing.

Other transaction fees:

• Switch fees: Charged when moving investments within the same fund family.
• Short-term trading fees: Applied if you sell or transfer a fund within a specified time (e.g., 30 days).
• Redemption fees: Fees charged if you redeem funds too early. These only apply to funds purchased before June 1, 2022, under the DSC schedule.

The MER consists of:

• Management fees: Paid to the fund company for overseeing the fund and managing investments.
• Operating expenses: Cover administration, legal fees, audits, and more.

MERs can range from less than 1% to over 3%. Even small differences in these fees can lead to significant variations in your long-term returns. Always review the MER before buying a fund and compare it to similar funds.

Most mutual fund companies pay trailing commissions to the advisor’s firm for ongoing advice and service. These commissions are included in the MER and range from 0.25% to 1.5% annually. For self-directed investors, trailing fees on mutual funds and ETFs were banned as of June 1, 2022. If you transfer funds to a discount brokerage, check whether your funds will be automatically switched to no-trailer-fee versions.

As of September 2024, mutual funds in Canada hold approximately $2.9 trillion in assets, while exchange-traded funds (ETFs) account for about $479 billion. This indicates that ETFs now represent 18% of the Canadian fund industry's total assets.

The ETF market in Canada is experiencing significant growth, with net sales reaching $5.5 billion in September 2024, compared to $790 million for mutual funds during the same period¹. This trend suggests a gradual shift as investors increasingly consider ETFs as a viable investment option.

Despite this growth, mutual funds continue to dominate the Canadian investment landscape, holding the majority of assets under management. However, the expanding ETF market reflects a diversification in investment preferences among Canadians.

Mutual funds are sold in a variety of ‘classes’ with the most widely available being the Advisor-class or A-series funds. According to Morningstar, the median fee for a balanced A-series mutual fund is around 2.04%.

The advisors working at these banks and investment dealers are typically commission-based and the mutual fund fee structure supports this by paying a trailing commission to the advisor and their firm for ongoing advice.

The fee for an equity mutual fund might break down like this:

• Administrative fee (overhead) – 0.25%
• Investment manager fee – 1.00%
• Trailing commission (split between advisor and firm) – 1.00%
• = Total management expense ratio (MER) – 2.25%

Most equity mutual funds pay a 1% trailing commission to the advisor and firm, while income or bond mutual funds pay a 0.5% trailing commission. The benefit to most investors is the low barrier to entry. Literally walk into any bank branch and you could start investing with as little as $25 per month.

How to find the fees:

Every mutual fund has a Fund Facts document that outlines the fund’s objective, risk rating, investment holdings, and fees. Search the name of the mutual fund or the ‘fund code’ to find the appropriate Fund Facts document.

You’ll see quick facts:

The Fund Facts document is helpful to find relevant information on the specific mutual fund(s) you’re invested in, but there’s another way to find the fees you’re paying and that’s on your investment statement that you receive every month:

Here you can see your fees expressed in dollar terms rather than in percentages, which provides helpful context for investors. It’s important to note that investors don’t pay these fees directly, instead they reduce the returns of the fund.

Investors can access F-series funds if they enter into a relationship with a fee-based advisor. F-series funds strip out the trailing commission and don’t pay anything to the advisor. That means the fee-based advisor charges their clients directly, typically in the range of 1% or less.

The benefit of using a fee-based advisor is that they tend to have access to a wider range of investments, including lower-cost funds. So, even though you might pay the same 1% fee to your fee-based advisor, they could potentially reduce your fees by sourcing out cheaper funds – say with an average of 0.50% – meaning you save 0.75% from our A-series example above.

• Fee-based advisor fee – 1.00%
• Product cost – 0.50%
• = Total management expense ratio (MER) – 1.50%

The challenge of moving from a commission-based fee model at the bank to a fee-based model with an independent advisor is that there may be a minimum portfolio size required to access fee-based advice. This threshold can start as high as $500,000.

How to find the fees:

Once again, you’d look for the Fund Fact sheet for the specific F-series mutual fund you’re interested in. You’ll find the quick facts on the fund, plus the explanation of fees:

Note the much lower management expense ratio (MER) on the F-series funds. That’s specifically related to the fact that F-series funds do not include an embedded trailer fee paid back to the advisor and firm.

Finally, you’ll see your fees expressed in dollar terms inside your monthly investment statements:

D-Series mutual funds are a low-cost fund series designed specifically for do-it-yourself investors. These funds are cheaper because they don’t include an ongoing trailer fee. That makes sense because do-it-yourself investors shouldn’t be paying for advice that they’re not receiving.

Investors can’t access D-series funds through their bank – they must be bought through a self-directed platform.

One example is the TD Balanced Growth Mutual Fund. The A-Series version comes with a total MER of 2.24%, while the D-series version of the same fund comes with a total MER of 1.47%.

TD has a more striking example with its popular e-Series funds, which can only be purchased online through a discount brokerage platform. These e-Series funds come with extremely low MERs, ranging from 0.28% to 0.50%.

How to find the fees:

Search the mutual fund name or fund code to find its Fund Facts document. Here you’ll find the relevant quick facts along with a breakdown of fees:

With a self-directed platform, you’ll need to wait for the December year-end annual performance and fees and charges report to see the breakdown of fees paid related to D-series and E-series mutual funds.

The reason why investors can even find a list of fees on their investment statements is because of a regulatory initiative known as the Client Relationship Model, phase 2 – or CRM2 – that came into effect in 2016 requiring investment firms to better disclose fees and performance. Prior to CRM2, it was common for firms to express fees in percentage terms (i.e. 2% MER) rather than also disclosing the dollar amount.

Now, it’s required that investment statements clearly disclose fees and performance. Fees and other charges are to be itemized, including everything from trailing commissions, redemption fees, switch fees, and administration fees. The report is also supposed to provide a total dollar figure for the year, rather than simply using a percentage like the MER on a product.

Unfortunately, the mandatory fee disclosure and performance reporting seem to have done little to improve investors’ understanding of concepts like trailing commissions, deferred sales charges, and third-party compensation. Investors are still largely in the dark when it comes to the investment fees they pay.

Deferred sales charges (DSC) are a way for advisors to earn a commission upfront when investors first purchase a mutual fund – typically 5%. If the investor redeemed or sold the fund before a certain time, they would be charged a fee based on a sliding scale. This was a way for mutual fund companies to recoup the upfront commission they paid to the advisor. After seven years, the investor could redeem or sell the funds without penalty.

Thankfully, this insidious fee will be going away as of June 21, 2022. The Canadian Securities Administrators (CSA) has banned the practice of paying upfront sales commissions (known as deferred sales charges).

Investors may still see DSC funds listed on their statements. That’s because the ban on DSC funds will only apply to new funds sold, not to funds already in the deferred sales charge schedule.

Note that you can transfer out 10% of the balance of your fund each year fee-free under the DSC schedule, so if you find yourself stuck in DSC hell for a few more years you can at least get some portion of your portfolio out without penalty.

How to find the fees:

Look to the Fund Facts document to find out if your mutual fund was sold to you with a deferred sales charge schedule. If it was, you should see the schedule laid out like this:

On your investment statement, you should also see the specific mutual fund with the letters DSC listed beside the name – a dead giveaway that you’re caught in the dreaded DSC cycle.