A commission that a mutual fund pays to an investment advisor for recommending the fund to potential investors. The commission will be commensurate to the period during which the investor remains “invested” in the fund. It represents payments for any ongoing services provided by the investment advisor. The trailer fee structure differs across various types of funds. For a front-end load fund, payment is usually set in the limit of 1%, while for a rear-end load fund it may not exceed 0.5%.
As payment to advisors is linked to recommendations rendered for personal gains, trailer fees may be perceived to be associated with a degree of conflict of interest.
Trailer fees are a component of a fund’s management expense ratio (MER).
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