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Mutual Fund Fees Part Two: Trailing Commissions

Following up to last week’s post, we will focus our attention on trailer fees, which is the main way we make a living in our practice. Trailer fees and their information can be found on page 11 (section 10) of the Important Client Information Brochure, and on page 14 of the Mackenzie document “Fees and Mutual Fund Investing: The Facts”Found on our “Thinking out Loud” page.

Trailers are commissions paid to advisors from mutual fund companies in order to continue servicing clients. Most mutual funds that clients purchase will compensate an advisor regardless of what load (see previous post) they choose. Although, if a mutual fund has been purchased on a “low load” or “deferred sales charge” the trailing commissions are usually less than if purchased on a “front end load”.

So how much is a trailing commission? How is it paid? How do you know what you are paying? I hope by the end of this post you will be able to answer these questions.

First of all, trailing commissions are paid to your advisor as a part of the Management Expense Ratio (MER) that you can find with any mutual fund you purchase. A great graph and explanation of MERs can be found starting on page 7 of the “Fees and Mutual Fund Investing: The Facts” document.

When the fund company charges and MER, it is made up of a few different components. One of these components is the trailing fee which is then paid to the dealer (think institution your advisor works with, Manulife Securities Incorporated in our case) and then a piece of that goes to the advisor. The fee is “embedded” meaning that clients don’t pay for it out of pocket, but instead the mutual fund charges the MER directly on the assets you have with them. The MER that they may charge will vary, depending on the type of investments in the fund, but the trailer typically stays the same. For simplicity sake, we will assume that most investors pay 1% of the value of their investment as a trailer over the course of a given year.

Let’s think about this in dollar terms. If you have $100,000 invested in mutual funds, you would be paying $1,000 as a trailer fee to the institution you are working with. The institution then pays your advisor a piece of that.

For many of our clients, the trailer fee that you are paying will be the only fee you pay us to manage your account.

Starting in January of 2017 these trailer fees will be clearly laid out for every investor. Most people feel like they are not paying a fee in order to have someone manage their investments, regardless of which institution helps you manage your money. They may be shocked to see that they are paying their branch for their advice.

This is not to be confused with the yearly administration/trustee fee. This annual fee is actually paid directly to the dealer (Manulife Securities Incorporated) and goes to cover the trusteeship over your registered accounts (they deal with the government to help report and track your registered plans). Please see the Manulife Securities Administration and Service Fees Brochure for more information on this.

The next topic will be on Traditional Broker/Advisor compensation.

Call 403.220.9808