How you pay for mutual funds

By Melissa Shin | September 2, 2014 | Last updated on November 8, 2023
3 min read

When you invest in a mutual fund, you can’t swipe your credit card or hand over a stack of cash to pay your advisor and the fund company. Instead, your payment’s deducted from the amount you invest.

That payment comes in two parts:

  • Sales charge
  • Management expense ratio

What’s a sales charge?

The sales charge is a one-time fee. It’s a percentage of your investment, usually no higher than 7%, that you either pay up-front (called a front-end sales charge) or later, if you sell within a set period (known as a deferred sales charge or low-load sales charge).

For the latter two options, the longer you hold the fund, the lower the fee. Under the deferred sales charge regime, most fund companies reduce your fee to zero if you hold the fund for seven years. Under the low-load sales charge regime, most fund companies reduce your fee to zero if you hold the fund for three years.

You pick which type of sales charge to pay; your advisor may also offer funds without a sales charge.

What’s an MER?

You also pay a management expense ratio, or MER. But this ratio isn’t charged directly; it reduces your investment’s annual return.

MERs typically range from 0.75% to 3%. Your advisor can help you compare MERs among similar funds. Index funds tend to have lower MERs, since the costs to manage them are lower. Bond-heavy funds tend to have lower MERs than equity-heavy funds, since equities typically require more oversight.

Part of the MER covers the fund’s operating expenses. A fund’s operating expenses could include paying a portfolio manager to make investment decisions; bookkeeping and administrative fees; marketing costs; regulatory, legal and audit fees; and HST/GST.

Another portion of the MER compensates your advisor via a trailing commission. That commission, or trailer, is usually between 0.25% and 1.5%. If you own what’s known as F-class funds, that trailer would be eliminated and your advisor would negotiate a fee directly with you. In some cases, that fee is tax-deductible.

How your advisor earns the trailing commission

A trailer covers the cost of your advisor’s counsel. This includes your annual meetings, phone calls and what advisors typically consider to be value-added services.

Services your advisor may provide include:

  • Analysis of your financial goals
  • Advice on how to reach those goals, including suitable investment and insurance solutions
  • Advice on how to structure your corporation or partnership
  • Tax planning, including how to minimize your taxes owing, how to use registered and non-registered accounts, and tax filing services
  • Estate planning, including will reviews, trust planning, powers of attorney advice, and end-of-life planning
  • Life planning, including advice on home buying, your child’s education, career changes and other life events
  • Divorce planning, including advice on tax minimization and how to split assets, as well as revision of estate plans
  • Advice for your children, even if they don’t meet your advisor’s minimum
  • Retirement planning, including discussing your employee pension benefits, Old Age Security (OAS) and Canada Pension Plan (CPP)
  • Cash flow management, including setting a budget and creating a savings plan

Some advisors aren’t paid a salary, and are only compensated by trailers. Others charge a flat fee for service; still others earn a mix of compensation. Talk to your advisor about how she’s paid.

Other mutual fund fees to note

A fund’s trading expense ratio also reduces your investment’s annual return. It’s usually below 0.50%. This ratio is meant to recoup the fund’s trading costs. The more turnover in the fund’s holdings, usually, the higher the trading costs.

You may also have to pay switching fees if you want to move into another mutual fund from the same manufacturer. If you do this within 90 days of purchase, you’ll likely have to pay a short-term trading fee. These fees are usually around 2%.

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Melissa Shin

Melissa is the editorial director of and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at You may also call or text 416-847-8038 to provide a confidential tip.