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

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 the investor with ongoing investment advice and services. This fee will be paid annually to the advisor for as long as the investor owns the fund. The trailer fee is also known as a "trailer commission" throughout the financial industry.

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, you’ll often see fees with them. 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. Other expenses you may encounter as you examine fees associated with operating the mutual fund include the following: 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 that are 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 as to whether or not a mutual fund salesperson is receiving a trailer fee. It’s important to note that trailer fees are somewhat controversial. The reason for the debate is related to their potential to cause conflicts of interest. 

An advisor who is considering two mutual fund offerings to recommend could potentially opt for the fund with a trailer fee as opposed to the one without it due to the anticipated annual compensation they have their sights set on. If a mutual fund comes with a trailer fee, it is typically set in a range of 0.25% to 1% of the mutual fund’s expenses.

Example of a Trailer Fee

Investment companies are required to provide full disclosure of all fees charged by a registered mutual fund offering. This requirement ensures that the investor has the requisite information needed to make a properly 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 it units.