Mutual Fund Fees (Trailer, Management, Platform, Redemption)

Costs matter. And the only you get is what you don´t pay for. Beware the fees. In investing there are fees everywhere. Here we show a bunch of them.

Top costs:

• Trailer Fees included in the MER
• Platform Fees
• Management fees and Operating Expenses (MER) (paid by the fund)
• Distribution Fees
• Redemption Fees
• Short Term Trading Fees
• Sale Charges

Trailer Fees

A trailer fee is a fee that a mutual fund manager pays to a salesperson who sells the fund to investors. The mutual fund manager offers a service commission which provides with investor with ongoing investment advice and services. The trailer fee is paid to the advisor annually for as long as the investor owns the fund.

These fees generally range between 0.25% and 1% and are paid out of the fund’s management expenses.

Platform Fees

Platform fees are a means of consolidating and managing an investor’s investment portfolio and financial plans. They are services offered for a fee or a series of charges that cover all administrative and management costs. This type of service is also sometimes known as an investment platform or financial platform service.

Nowadays most platforms buy, sell and hold funds through other platforms. Some platforms only offer funds while others give you access to the investment trusts, UK and overseas shares, ETFs, corporate bonds and government securities. Some offer lots of tools, research and model portfolios to help work out the best investments, while others are more basic.

Here are some of the series of charges you may have to pay:

The Expense Ratio (ER) OR Management Expense Ratio (MER)

• It costs money to run a mutual fund. Some funds cost more to operate than others. Regardless of the cost, all mutual funds have a fee referred to as an expense ratio or sometimes a management fee or operating expense. They are paid by the fund, and are expressed as an annual percentage of the total value of the fund.
• An expense ratio is determined by dividing a fund’s operating expenses by the average dollar value of its assets under management (AUM). MERs can range from less than 1% to more than 3%. While you don’t pay these expenses directly, they affect you because they reduce the fund’s returns. This can add up over time.
• The management fee includes the services of:
  • Overseeing the fund.
  • Hiring a portfolio manager to make investment decisions
  • Hiring other companies to assist in the administration of the fund
• General Price Conditions:
  • Actively managed funds have higher operating expenses than passive funds or index funds. This is because an actively managed fund is conducting ongoing research, trying to determine the best securities to own.
• International funds have higher fees than domestic funds.
• Small-cap funds have higher fees than large-cap funds. Its costs more to buy and sell small stocks than large ones. This higher cost is passed along in the form of higher expense ratios.
• Index funds or passively managed funds typically have the lowest fees, and finding these types of funds has been proven to be a strong indicator of good future fund performance.
• Different companies may charge widely varying expense ratios for similar funds.

12(b)1 Fee, Service Fee or Distribution Fee

• Many funds have an ongoing service or marketing fee, also called a 12(b)1 fee, which is paid to the financial advisor or to a financial services company as a compensation for marketing the fund. It is a component of a mutual fund’s total expense ratio.
• According to the Securities and Exchange Commission (SEC), “these fees are deducted from a mutual fund to compensate securities professionals for sales efforts and services provided to the fund’s investors.”
• 12b-1 also has a percentage fee, such as 25 basis points or 0.25% of all the assets managed in a fund. Estimates of 12(b)1 have been around $10 billion annually in recent years.
  • Basis points – common unit of measure for the interest rates and other percentages to finance – used to calculate changes in interest rates, equity indices and the yield of a fixed-income security.
• This type of fee was previously charged to the clients by the investors however now due to Mifid II (Markets in Financial Instruments Directive), this type of fee has been eliminated in order to reduce the investment cost for the clients. However, the European Directive only allows this fee to be charged if the investor offers both fund marketing and investment advice.
• However, third party distributors, especially banks, have begun to charge ‘custody fees’ which have replaced the previously used distribution fee mentioned. But, this fee does not entail any additional cost for the investor because the Hacienda (The Treasury) allows it to be deducted for personal income tax purposes, provided that the funds do not belong to the distributor and that global accounts are used.
• Regarding the cost of this new fee, it has not yet been established however it is usually between 0.4% and 0.75%.

Redemption Fees

• Redemption fee is a fee charged to an investor when shares are sold from a fund. The fee is charged by the fund company and added back to the fund. A redemption fee may also be known as an ‘exit fee,’ or referred to as a “back-end loan.”
• Most redemption fees will have a specific time limit within to pay, usually 40 days.
• Redemption fees are needed to protect other investors from higher transaction costs.

Short Term Trading Fees

• Mutual funds are designed to have long-term investments; short-term trading fees have been imposed on some funds to discourage investors from trading in and out of funds.
• Short term trading fees are imposed when you purchase shares and then sell them again within 30-90 days. In this scenario, the mutual fund may charge you a fee of 1 to 3% upon the sale of the recently purchased shares.

Sales Charge

• When you buy an “a share” in a mutual fund, you will pay a commission to a financial intermediary (broker, financial planner, investment advisor, distributor, etc), however different mutual funds have different charges/commissions.
  • Some common types of sales charges include the following:
    • Front end Charges – this is the initial sales charges or upfront fees. It is paid as a percentage of the purchase price at the time of the investment. Class A shares often have front end sales charges.
    • With a front-end load fund, if your total investment amount exceeds a threshold amount and you are willing to invest it all into the same fund family, you may qualify for what is called a “breakpoint,” or a lower upfront fee.
    • Back end – funds with a back-end load don’t charge an upfront fee; instead, they charge a fee when shares in the fund are sold. Back end sales charges are often associated with Class B shares of a fund.
• Level loads – these funds have no upfront sales charge, but typically take a 1% interest if shares are sold within the first year. Here too 12(b)-1 fees can be higher than funds with front-end loads, which means the fund may be more expensive to own in general, even without a sales charge.
• Deferred – a deferred sales charge is typically a back-end sales charge that is often charged during a specific timeframe with a decreasing rate over time.

To conclude, many mutual fund fees are important to take into account before investing in a mutual fund however understanding how these fees work can help build the best portfolio for you.