Trailer Fee Definition, How It Works, Pros/Cons, Examples

Anthony Battle is a CERTIFIED FINANCIAL PLANNER™ professional. He earned the Chartered Financial Consultant® designation for advanced financial planning, the Chartered Life Underwriter® designation for advanced insurance specialization, the Accredited Financial Counselor® for Financial Counseling and both the Retirement Income Certified Professional® and Certified Retirement Counselor designations for advance retirement planning.

What Is a Trailer Fee?

A trailer fee is a fee that a mutual fund manager pays to a salesperson who sells the fund to investors. The trailer fee is paid to the salesperson for providing ongoing investment advice and services. This fee will be paid annually to the advisor as long as the investor owns the fund. The trailer fee is also known as a "trailer commission" in the financial industry.

Key Takeaways

• A trailer fee is a payment made to a broker by a mutual fund manager for selling the fund to an investor and continually providing investment advice and services.
• Trailer fees fall under management fees and are withheld by the mutual fund manager at the time of purchase, exchange, or redemption of mutual fund shares.
• Trailer fees will be detailed in a mutual fund’s prospectus.
• Trailer fees can be controversial due to the potential for a conflict of interest on the part of the advisor.
• Trailer fees typically range from 0.25% to 1% of the mutual fund’s expenses.

How a Trailer Fee Works

A trailer fee is one of many fees withheld by a mutual fund for management. Mutual fund fees are charged for various reasons. With investor transactions, fees are often involved. Mutual fund investors are typically charged a fee when they purchase, exchange, or redeem mutual fund shares.

Other fees, including the trailer fee, are associated with the overall operating costs of the mutual funds. Additional expenses associated with operating the mutual fund include investment advisory fees, marketing and distribution expenses, brokerage fees, custodial fees, transfer agency fees, legal fees, and accounting fees.

Advantages and Disadvantages of a Trailer Fee

If a mutual fund charges a trailer fee, it will be detailed in the mutual fund’s prospectus. It will appear as part of the mutual fund’s total management fee. Mutual funds must provide full disclosure of all fees charged by the fund. A mutual fund’s management fee is typically displayed with the characteristics of a fund on the marketing collateral.

Investors should inquire about whether a mutual fund salesperson is receiving a trailer fee. Trailer fees are somewhat controversial due to their potential to cause conflicts of interest.

An advisor considering two mutual fund offerings to recommend could potentially choose the fund with a trailer fee for the anticipated annual compensation. Trailer fees are usually set between 0.25% to 1% of the mutual fund’s expenses.

Knowing about trailer fees and whether your investments include them is essential for well-informed investing.

Example of a Trailer Fee

Investment companies are required to provide full disclosure of all fees charged by a registered mutual fund offering. This ensures that the investor has the necessary information to make an informed decision. The list of fees can be found in the mutual fund’s prospectus, often under the heading “shareholder fees” where applicable.

To provide further clarity, an example of the reporting of trailer fees can be found in the following prospectus from Russell Investments: Russell Investment Simplified Prospectus. This fund charges a 1% trailer fee on certain serieses of its units.