Understanding Trailer Fees
Trailer: A furnished vehicle drawn by a truck or automobile
and used when parked as a dwelling. -- American Heritage Dictionary
Last Sunday morning my 13-year-old granddaughter was sitting with me on the deck enjoying the sun and the view. An article in the paper about mutual fund fees caught my attention. Feeling that it was my duty as a grandfather to pass on some financial wisdom, I asked my granddaughter a question.
“Jordan, what are trailer fees?”
“Granddad, don’t be silly,” she replied. “You know what they are.”
“But do you?”
Very pleased with herself, she answered, “Of course I do. Trailer fees are the fees that Bubbles, Ricky, and Julian pay every month to the Sunnyvale Trailer Park.”
Laughing at her reference to the Trailer Park boys of television fame, I said, “That is a very good answer and just as clear and understandable as any I have seen. Not only did you inherit my good looks and brains but obviously my sense of humor as well. You are close but actually the term refers to mutual funds not trailer parks.”
“I knew that but I just wanted to pull your leg,” my precocious granddaughter said. “But I really don’t know exactly what they are.”
“You are not the only one,” I said. “Most people do not understand them or even realize that they’re paying them.”
I went inside to get the definition of The Investment Funds Institute of Canada and read it to her, knowing I could well cause an energetic teen to take an unexpected morning nap.
“Trailer fees,” I told her, “are ‘ongoing commissions paid by the fund company to advisors and dealers for ongoing service and advice. Each year the dealer gets an amount that equals a certain percentage of your account’s value. This can vary depending on the purchase option and is often about 1% on front-load accounts and ½% on DSC accounts with your advisor receiving a portion of those payments. No-load companies may also pay trailers to dealers. Dealers disburse the fees to their advisors, financial planners, sales representatives, and bank employees of a financial institution. You do not pay trailer fees directly. They are paid by the mutual fund company -- in most cases from its management fee. As with commissions, funds that carry low trailers or none at all may or may not have lower management expense ratios.’ ”
Jordan rubbed her eyes and said, “Granddad, I still do not know what they mean. Can you explain them to me?”
“OK. Imagine that mutual fund companies are really owners of trailer parks. Let’s assume Bubbles wants to move to a new trailer park. He has his eyes on nice double-wide in the Safe Harbor Trailer Park owned by the Thompson Trailer Park Corporation. He cannot just go to the trailer park and buy that double-wide beauty. He has to go to a trailer park advisor and she will purchase it for him. He will pay a commission to the advisor for helping him purchase the trailer.”
“Is that what they mean by trailer fees?”
“No, but we are getting closer. Once Bubbles moves into his new trailer, he has to pay management fees to the Thompson Trailer Park Corporation for managing the Safe Harbor Trailer Park. It will help pay for the on-site manager who manages the property as well as regular maintenance and any improvements they make to the trailer park.”
“Is that what they mean by trailer fees?”
“No, but we are almost there. Part of the management fee will go the trailer park advisor who sold him that double-wide trailer for as long as he owns it. It is supposed to pay for the advice and service that Bubbles will get from the advisor. That fee is the trailer fee.”
“Granddad, if Bubbles just moved in, why would he need any more advice from the advisor about the trailer park? If he doesn’t need or want the advice, then does he have to still pay for it?”
“He still has to pay the trailer fee even if he does not need or want the advice, for as long as he lives there.”
“When he buys a trailer he pays a commission to the advisor?”
“Yes.”
“If he does not sell it, he pays another commission in the form of a trailer fee to the same advisor?”
“That’s right.”
“Then Bubbles pays a commission for buying the trailer and then he pays more commissions for not selling it?”
“Now you understand trailer fees.”
“Granddad, the mutual fund sales business sounds like a pretty good business.”
“You are right. Where else can you make money by selling a customer a product and then have the same customer pay you more money for keeping it!”
“But Granddad, why do they call those commissions trailer fees?”
“Another day.”
