Trailer fees - Financial definition
Financial acronyms
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Concise definition of the term trailer fees
Trailer fees, also known as trailing commissions or trailer commissions, are fees paid to financial advisors or intermediaries for providing ongoing services and advice to investors who hold investments in mutual funds or other investment products. These fees are paid by the investment fund company (usually a mutual fund company) to compensate the financial advisor for their services, and they are typically a percentage of the assets under management (AUM) in the fund.
Comprehensive definition of the term trailer fees
Here's how trailer fees work:
Compensation for Financial Advice: When investors purchase mutual funds through a financial advisor or intermediary, the advisor provides ongoing services such as portfolio monitoring, investment advice, financial planning, and periodic reviews. The trailer fee compensates the advisor for these ongoing services.
Based on Assets Under Management: The trailer fee is calculated as a percentage of the assets that the investor has invested in the fund. This percentage is typically a small fraction of the total assets under management and is deducted directly from the fund's management fees.
Paid by Fund Company: The trailer fee is paid by the mutual fund company or investment provider out of the management fees charged to the fund. It is not an additional cost borne directly by the investor but is embedded in the overall fees of the fund.
Types of Trailer Fees: There are different types of trailer fees, such as front-end loads (paid upfront when purchasing the fund) and back-end loads (paid when redeeming the fund). These fees structures can vary based on the fund and the distribution channel.
Regulatory Considerations: Trailer fees have been a topic of regulatory scrutiny in some jurisdictions, with concerns about potential conflicts of interest or lack of transparency. Regulatory bodies may impose rules or guidelines regarding the disclosure of trailer fees to investors.
Overall, trailer fees play a role in compensating financial advisors for the ongoing services they provide to investors, and they are an integral part of the distribution and management structure of mutual funds and other investment products.