It costs money to manage a share fund, not only is there brokerage, but also advertising, researchers salaries, travel expenses for sending researchers all over the place to visit companies, various levels of management, fees charged by specialists such as risk analysts and currency hedgers as well as mundane stuff like mailing out members reports and printing prospectuses.

In addition the overwhelming majority of fund managers are working in the hope of receiving a profit for the shareholders of their own company.

All of these expenses are usually tallied up and charged to investors as management expenses. Depending on how much money you put into the fund, and whether or not you pay the fund an entry fee or exit fee the fund may calculate different charges for different investors.

Together, these management expenses are usually charged as a percentage of capital invested. The name given to the percentage of your funds taken each year is the Management Expenses Ratio, or MER.

Although entry commissions and review fees earned by financial advisers are not included in the MER (they are quite separate), trail commissions are included. How you enter the fund can also make a difference to the MER because if you went in with an entry fee the fund manager will take a percentage of that entry fee (the adviser doesn't get the whole lot) and because they have been paid up front may quote a different MER for investors with an entry fee people rather than those who have chosen to accept an exit fee, typically charging a lower ongoing MER for entry fee clients, applying a different formula when calculating unit prices. Just because a fund's portfolio has doubled in value doesn't necessarily mean that unit prices will exactly double. The MER is levied by applying that cost against unit prices, while of course there will be a strong relationship between portfolio performance and these prices, the manager does take a bit more of the share profits than they give back in quoted prices.

MERs also change dramatically with the amount invested. Typically if you go into a wholesale fund the MER is one or more percentage points lower than a retail fund. For some funds that don't have a separate wholesale or retail product the MER may decrease incrementally for larger amounts invested. As I've said, no two fund managers seem to use the MER in the same way. If you are really bothered by it you should seek information from the specific manager about how the MER works for your fund.

The reasons for that are fairly obvious, rather than having to mail out a few thousand annual reports, a wholesale manager or manager of large sums only has to do one report and make one transaction.

You'll also note that extra options add to the MER, typically the MER is slightly higher for diversified multi-sector funds, you'll usually note a higher MER on the hedged version of a fund where there is a hedged or unhedged option to choose, if the fund is geared then there will be borrowing expenses that all add on to the MER.

Management expenses ratios are usually fixed expenses that are determined by the fund manager itself based on their own estimates of the cost of managing funds. The financial planner has absolutely no say at all over what MER you get aside from advising on the MERs charged for different fee options. You will fund the MER mentioned in the prospectus of the investment and although managers may vary the MER as expenses vary, they are usually capped at a certain percentage over several years.

Buying a fund via a discount broker will not give you a cheaper MER, because discount brokers take the full trail commission even if they rebate the full entry fee.

According to various studies by Australian fund researchers, there appears to be very little competition among fund managers on fees. Fund managers would rather spend money on image building advertisements instead of simply cutting the MER. The focus is on building an image of respectability, not necessarily living up to it. This reflects the "product selling" nature of the funds management business, as opposed to the more purist ideal model where fund managers would instead focus on trying to give the best return to their investors.