Mutual Fund Fee Question
This question has been asked in many different ways, many different times:
Hi, Tracy
Just wondering: when clients invest in mutual funds with you, do you charge a purchase fee, as well as a front-end and/or back-end load?
Thanks,
My answer:
Thank you for asking - 1st, let me say that I don't manage money for clients anymore. So your question can be answered in a general way if that's ok? Actuallly, I think you might find you end up with more questions than answers but hopefully they will lead to the answers you need.
Mutual funds all have a service fee or trailer fee inherent in their structure. You will hear this talked about as the MER (management expense ratio). This fee will range depending on individual fund, company, type of investment, and fee structure. This second fee structure is the sales commission - usually front end, back end, or level or no loaded. The actual names aren't as important as the issues. Part of the MER is paid to the advisor selling you the fund as a servicing fee. This fee will vary depending on the other factors. Often the advisor will receive a higher regular service fee (sometimes called a trailer fee) paid to them when they sell front end loaded funds. You can ask your advisor to explain to you how much of a trailer fee they will get on a percentage basis for the various fee structure they are recommending.
A front end fee is an additional fee that the advisor can charge you independent of the trailer which cannont be adjusted. This front end fee can be anywhere from 0 - 5 or 6%. Many advisors are offering a 0% front end because they have a longer term view of the client relationship.
A back end fee is not paid by you, the client, rather is paid to the advisor by the fund company and it is in the range of 5% upfront. The cost to the client in this arrangement is not the fees, rather it is the loss of flexibility because if you want to cash in your funds or move them to another fund company during a period of decreasing fees (often up to 6 or 7 years), then you pay a fee at that time. This fee is usually based on your original investment and you are allowed free redemptions up to a specified amount (often 10%) each year while you are in the deferred or back end sales program.
The other ways: no load, or level load, or the new classes of funds available are variations of these plans. The basic premise is either you pay nothing going in or going out, but a fee is paid on your total assets in an account, or you have a shorter time frame in the deffered type arrangement, or other plan. I have heard of advisors charging an upfront fee over and above the no-load or front end option, but I have not yet understood how or why. That doesn't mean it's bad or won't work - it's up to you to make sure you feel that what they are charging and what they are going to do for the money they earn is reasonable given your expecations and goals.
My recommendation to you, therefore, is to get it explained in detail. Then take time to consider your plans, your relationship, the other options available, and most importantly - what service you are going to receive from the advisor for the fee they will be paid. They need to be paid for their work and the responsibility they have in managing your funds, but they also need to be prepared to answer your questions about their service programs. And, finally, remember that the fee and rate of return are important considerations when making investment decisions, but.... not until everything else answers ok first.
There is also a whole series of questions, checklists, and templates on this topic in the MoneyMinding Method E-course if you need some more background.
I hope this helps.
Warmly,
Tracy
Copyright© 2006 Tracy Piercy, CFP
Written permission is required for reproduction. Thank you.
Hi, Tracy
Just wondering: when clients invest in mutual funds with you, do you charge a purchase fee, as well as a front-end and/or back-end load?
Thanks,
My answer:
Thank you for asking - 1st, let me say that I don't manage money for clients anymore. So your question can be answered in a general way if that's ok? Actuallly, I think you might find you end up with more questions than answers but hopefully they will lead to the answers you need.
Mutual funds all have a service fee or trailer fee inherent in their structure. You will hear this talked about as the MER (management expense ratio). This fee will range depending on individual fund, company, type of investment, and fee structure. This second fee structure is the sales commission - usually front end, back end, or level or no loaded. The actual names aren't as important as the issues. Part of the MER is paid to the advisor selling you the fund as a servicing fee. This fee will vary depending on the other factors. Often the advisor will receive a higher regular service fee (sometimes called a trailer fee) paid to them when they sell front end loaded funds. You can ask your advisor to explain to you how much of a trailer fee they will get on a percentage basis for the various fee structure they are recommending.
A front end fee is an additional fee that the advisor can charge you independent of the trailer which cannont be adjusted. This front end fee can be anywhere from 0 - 5 or 6%. Many advisors are offering a 0% front end because they have a longer term view of the client relationship.
A back end fee is not paid by you, the client, rather is paid to the advisor by the fund company and it is in the range of 5% upfront. The cost to the client in this arrangement is not the fees, rather it is the loss of flexibility because if you want to cash in your funds or move them to another fund company during a period of decreasing fees (often up to 6 or 7 years), then you pay a fee at that time. This fee is usually based on your original investment and you are allowed free redemptions up to a specified amount (often 10%) each year while you are in the deferred or back end sales program.
The other ways: no load, or level load, or the new classes of funds available are variations of these plans. The basic premise is either you pay nothing going in or going out, but a fee is paid on your total assets in an account, or you have a shorter time frame in the deffered type arrangement, or other plan. I have heard of advisors charging an upfront fee over and above the no-load or front end option, but I have not yet understood how or why. That doesn't mean it's bad or won't work - it's up to you to make sure you feel that what they are charging and what they are going to do for the money they earn is reasonable given your expecations and goals.
My recommendation to you, therefore, is to get it explained in detail. Then take time to consider your plans, your relationship, the other options available, and most importantly - what service you are going to receive from the advisor for the fee they will be paid. They need to be paid for their work and the responsibility they have in managing your funds, but they also need to be prepared to answer your questions about their service programs. And, finally, remember that the fee and rate of return are important considerations when making investment decisions, but.... not until everything else answers ok first.
There is also a whole series of questions, checklists, and templates on this topic in the MoneyMinding Method E-course if you need some more background.
I hope this helps.
Warmly,
Tracy
Copyright© 2006 Tracy Piercy, CFP
Written permission is required for reproduction. Thank you.
posted by Tracy Piercy at 2:14 PM
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