Q: I recently moved my mutual funds from my advisor to a self-directed investment account. I’d like to know if the trailer fees on these mutual funds still go to my old advisor. If not, who gets them?
— Anne Doran, Toronto
A: A trailer fee, or trailing commission, is designed to pay advisors for the ongoing service they provide their clients. The commission is typically 0.5% to 1% annually, and it’s included in the management expense ratio of the fund. Not all mutual funds include trailer fees, but the ones sold through advisors and labelled series A, B, or C typically do.
If you purchase a mutual fund through an advisor and then transfer it to an online brokerage, the trailing commission will go to your new brokerage. This is a great deal for them, but not so much for you. After all, the purpose of a trailing commission is to compensate an advisor for planning and advice, but since online brokerages don’t provide these services, they’re collecting a hefty fee simply for holding your fund. If you want to continue holding these mutual funds, check to see if the funds are available in “series D” versions. This class of fund is designed with DIY investors in mind and charge a smaller trailer, typically around 0.25%. The switch to a D-series fund should be free, and there are no tax consequences even if the fund is in a non-registered account.
Better still, if you plan to buy mutual funds in a self-directed account, consider using low-cost fund providers that don’t pay trailer fees at all, such as Mawer, Steadyhand and Leith Wheeler.
—Dan Bortolotti, CFP, CIM, associate portfolio manager with PWL Capital in Toronto