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A trailer fee is a payment from the manager of a mutual fund to a salesperson who provides support and service to customers. As long as a client retains shares in the fund, the salesperson receives a trailer fee. This can potentially create a conflict of interest and investors may want to ask their advisors about any compensation they receive in connection with client activities. Being aware of fees of this nature can help investors make an informed decision when they decide where to invest.
From the perspective of a mutual fund manager, putting sales into the hands of another financial professional can allow the manager to focus on handling the fund. Managers set goals for the fund, analyze available investments, and make decisions on how to distribute assets to maximize returns. Separate salespeople can drive traffic to the fund, increasing the number of investors and making more funds available for investment.
The fund compensates the salesperson for providing advice, recommendations, and information to investors, essentially paying for the salesperson’s services. It is not quite the same as a commission, where people receive payment for making a sale but don’t have ongoing support obligations. Clients expect to be able to contact a sales representative in the future if they have questions or concerns, or wish to exit the fund. Not all funds offer a trailer fee and the amount offered can vary.
Clients may have concerns about a trailer fee because it could influence recommendations. In a situation where a salesperson receives compensation for recommending a particular product, salespeople may be tempted to pick the option that benefits them most, rather than the best product for the client. Customers can ask why a particular fund is being recommended and may want to get information about alternatives before they make a decision to invest. This can help them determine whether a salesperson’s recommendations are in their best interests.
Laws and ethical standards in some regions require financial services professionals to disclose financial relationships before making transactions. In these situations, if a client’s investing decisions will net a trailer fee for the salesperson, this must be discussed. Financial disclosures can also include detailed lists of account fees so clients understand the associated costs with their investments, such as annual maintenance fees the mutual fund may require them to pay as long as they retain shares or transaction fees associated with selling their shares.