How do trailing fees work

Others are deducted for as long as you hold your mutual funds. These include management costs. The management expense ratio MER represents the total annual expenses required for the fund to operate. The MER depends on the type of product. A bond fund, for example, is likely to be less costly than an equity fund, for which choosing securities demands greater expertise.

This covers the fees paid to the investment fund and portfolio managers; the trailing commission, if any, given to your brokerage firm and investment advisor; and other related charges.

These include any applicable taxes, borrowing expenses and all fees incurred in obtaining external services. Trailing commissions are remuneration for the advice you receive. The fund manager pays trailing commissions each year to the financial firm that sold you the fund a stock brokerage, for example. This firm may then allocate a portion of its commission to your advisor.

Trailing commissions appear unfair to many investors, but there are some justifications. A trailing commission is not supposed to give an advisor income in perpetuity in exchange for doing nothing. The advisor should be reviewing your investments and providing you with advice. In theory, trailing commissions give the advisor an incentive to keep you in successful funds.

It can be easy to become discouraged during bear markets, and trailing commissions give your advisor a reason to keep you fully invested. A trailing commission is usually much better than giving your advisor a share of a load fee.

When the advisor gets a percentage of the load fee, the advisor has an incentive to move you in and out of mutual funds. That type of overtrading can reduce returns. Trailing commissions encourage your advisor to invest for long-term growth and avoid overtrading. As markets continue to develop, trailing commissions are becoming less justified and easier to avoid.

Many mutual funds do not have trailing commissions, and a large number of exchange-traded funds ETFs with low fees are also available. There are even a few low-cost mutual funds with high returns. Avoiding trailing commissions is just one way to stop paying high mutual fund fees. Reducing fees is the only sure way to improve returns, so mutual funds and hedge funds must do something special to justify extra fees. Trailing commissions can still make sense for funds focused on illiquid investments, such as direct real estate holdings, unlisted companies, and frontier markets.

These investments are not available in the U. Funds focused on illiquid investments have a good reason for using trailing commissions to keep advisors loyal and their clients invested. Financial Advisor. You may directly or indirectly pay fees and expenses when investing in mutual funds. These fees reduce the return you get on your investment Investment An item of value you buy to get income or to grow in value. You can redeem your fund units at any time. Not all mutual funds have the same fee structure.

You may pay varying one-time sales charges, ongoing management fees and other transactional costs and account fees Account fees The fees you pay to a financial institution for transactions and other services related to the operation of an account. Carefully review the fees and expenses of any funds you are considering, even for no-load funds. Even small differences in fees can translate into large differences in returns over time.

Contains information about the company or mutual fund selling the security, its management, products or services, plans and business risks. By law, a mutual fund company Mutual fund company An investment company that pools money from investors and invests it in a mix of investments, such as stocks, bonds, and money market investments. Most mutual fund companies offer a choice of more than one fund. This act is made up of laws that establish rules for issuing and trading securities.

The Ontario Securities Commission is the securities regulator for Ontario. Beginning May 30, , mutual fund companies are required to give investors a copy of Fund Facts Fund Facts A user-friendly guide that provides key information about a mutual fund including fees and performance.

Mutual fund companies are required to give investors a copy of Fund Facts before they decide to purchase a fund. Learn more about disclosure documents. You may pay a sales charge when you buy or sell units or shares of a fund. These sales charges are also known as loads. Funds may be offered with a front-end load Front-end load A sales fee that you pay at the time when you buy the investment. It reduces the amount you invest. Also called an Initial Sales Charge.

These sales charges are set by the mutual fund company. Find out which sales charge options Options An investment that gives you the right to buy or sell it at a set price by a set date. You buy options on a stock exchange. Certain charges, including the trailer fee, are related to the mutual funds' total operating costs. Other expenses that you may encounter when examining fees related to the operation of the mutual fund include investment advisory fees, marketing and distribution expenses, brokerage fees, custodial fees, transfer agency fees, legal fees and accounting fees.

If a mutual fund pays a trailer fee, it is specified in the prospectus of the mutual fund. It will appear as part of the total management fee for the mutual fund. Mutual funds must provide full notice of all fees charged by the fund. Usually, the management fee of a mutual fund is shown on the marketing collateral with the characteristics of a fund.

Investors should inquire whether a trailer fee is being paid to a mutual fund salesperson or not. It is important to note that there is some debate about trailer fees. The explanation for the debate has to do with their potential to cause conflicts of interest.