As the second phase of the client relationship model (CRM2) comes into effect, you will no doubt be having a significant number of conversations with your clients about fees. One aspect of this topic that is often misunderstood by clients is mutual fund fees.

In spite of the trend toward lower mutual fund fees, the fees for some funds remain relatively high — because of the expenses incurred in attempting to generate higher returns. It is therefore important that you help your clients understand why certain funds may have higher fees than others.

"The fees for some funds are higher largely due to the investment strategy of the fund," says Caroline Grimont, senior vice president, marketing and sales, with Excel Funds Management Inc. in Mississauga, Ont.

For example, she says, equity funds — particularly emerging market and global equity funds, which invest in various foreign markets — generally have higher fees because they incur more expenses to invest in these markets.

Grimont says that investors should not just look at the fees of a fund, but rather the value clients receive for the fees they pay. Clients should focus on the "net amount in their pocket," she says. A fund with higher fees that consistently shows higher net earnings than a fund with lower fees is worth investing in.

> Components of the fee
Explain to your clients that the fee charged by a mutual fund is often referred to as the management expense ratio (MER), which comprises two parts. The first part is the cost of managing the fund. This management fee, which is disclosed in the fund's prospectus, includes the cost of a portfolio manager to oversee the fund and make investment decisions.

The other component of the MER is the fund's operating expenses, which are variable and include costs such as fund administration, accounting, legal fees, client reporting and the harmonized sales tax.

> Why Fees Differ
"The investment strategy of a fund is one of the main determinants of differences in the fees charged by mutual funds," Grimont says.

Equity funds usually have higher fees than fixed-income funds because, in addition to the cost of a portfolio manager, these funds may also use analysts and risk-management professionals to assist in selecting stocks. The manager may also incur expenses to meet with the executives of various companies prior to making investment decisions.

However, explains Grimont, an equity fund that invests in stocks within a single market has lower expenses than one that invests in several global or emerging markets. For example, portfolio managers of an emerging market fund may hire sub-advisors in foreign markets and the lead manager may have to visit foreign companies in which the fund invests.

"Investors need to be aware that as they move further away from traditional markets, active management has been proven to be more effective in generating [performance], which comes at a cost," Grimont says.

In addition, funds with a global focus may use currency hedging strategies to minimize currency risk when investing in various markets, thereby incurring additional expenses.

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