- Trailer fees are ongoing commissions paid by a fund company to an investment advisor or distributor for as long as the client remains invested in the fund.
- Trailer commissions-based mechanism creates potential conflicts of interest, as distributors may be incentivised to sell funds that pay higher commissions.
- Endowus is pioneering the non-commissioned based digital wealth management model in Hong Kong, so that we can stay confidently independent and interest-aligned with our clients to help achieve their long-term investment and life goals.
What are trailer fees?
You probably have never heard of it - what are trailer fees and why should you care?
Trailer fees are commissions paid by fund management companies to fund distributors on an ongoing basis for as long as an investor stays in the fund.
If you refer to Hong Kong Securities and Futures Commission’s Investor and Financial Education Council (IFEC) website, the IFEC clearly notes that such a trailer commissions-based mechanism inherently creates potential conflicts of interest.
Why is that? As a commissions-remunerated salesman, your distributor will be incentivised to sell you funds that pay higher "trails", as the fees are called in industry lingo, and not necessarily the top-rated or most suitable fund that can help you achieve your investment goals.
You might also see many platforms these days advertising "zero fees" that seem to be too good to be true. And indeed, they can charge "zero" because these platforms are likely getting paid handsomely by the fund manager (usually up to 60% of the fund management fee) on an ongoing basis. This means that if the management fee is 2%, then about 1% is going back to the salesman, and most investors are not aware this is happening.
Just how big is the impact of an extra 1% paid in fees?
A $100,000 investment in a fund earning 7% per annum (a good return), but with a fee of 1.75% versus 0.75% will deprive you of 152% in returns ($152,000) over 30 years.
Do you find such trailer fees or sales commissions based fund distribution model to be a bit strange? Let’s imagine this happening when you go to a doctor.
You are sick and tell your doctor your symptoms, hoping he will prescribe you the right medicine based on his professional acknowledgement and judgement that’s best for you and most suited for your circumstances (e.g. any drug allergies, family medical history).
But imagine, instead of being paid by you for a consultation fee, your doctor is actually paid by drug manufacturers on commissions. And your doctor is therefore incentivised to prescribe you the drug that provides the highest commissions or “kickbacks”, instead of what’s best for your condition.
No one would agree to such a model if this actually happened. But why would you not hold your investments in unit trusts to the same standard. Aren’t health and wealth both equally important to our holistic wellbeing?
In other jurisdictions such as the United Kingdom, the Netherlands and Australia, the payment of trailer fee commissions to fund distributors have been banned. And it is no coincidence that these jurisdictions also rank best on Morningstar’s Global Investor Experience Study as markets with the lowest cost of investing, while Hong Kong ranks to be one of the most expensive markets to invest in.
Global Fees and Expenses Scorecard by Morningstar
In Hong Kong, instead of a blanket ban, the SFC requires all advisors and distributors in Hong Kong to disclose whether they receive trailer fees and also the maximum percentage of such commissions they receive from product issuers.
So next time you catch up with your financial adviser, ask for a full breakdown of your fees. You might be surprised to read all the small fine print and uncover that you have been paying handsomely for those coffees and lunches.
Read more: Guide on mutual fund fees in Hong Kong
Endowus as your independent advisor offering low, fair, transparent and interest-aligned pricing
There are funds that don’t pay trailer fees. “Clean” institutional share class of funds are trailer fee free but are typically only accessible directly by large institutions or high net worth individuals. At Endowus, we have worked hard to get you access to these with our fund management partners.
In the case where institutional share-class is not accessible, we will help you invest into the retail share class, but provide industry-first 100% Cashback on trailer fee commissions.
In our commitment to provide total alignment to our clients. Endowus is the first digital wealth advisor that we are aware of, to declare ourselves fully independent, under SFC’s Code of Conduct Clause 10.2’s requirements.
Your next question might then be, so how does Endowus make money? As your trusted financial advisor, we believe our fee model should be completely aligned with your interest. Endowus charges an all-in Endowus fee that is based on the value of assets you hold with Endowus, also known as Assets Under Advice (AUA) .
We don’t charge any upfront subscription fees, sales commissions, platform or wrap fees, and give you 100% Cashback on trailer fees, so that you keep much, much more of your returns.
Running on a non-commissions based revenue model allows us to stay truly independent and be able to recommend the most suitable products and solutions at the lowest achievable costs to help you achieve your long-term financial well-being.
Read more: Why invest through Endowus
The ability to access clean share class funds, combined with the Cashback on trailer fees have significantly brought down the costs of investing compared to industry average and allowed Endowus clients to collectively save over US$15 million since 2019, and this does not even include other savings from other subscriptions and platform wrap fees that are charged by other common retail platforms.
Below are two examples to illustrate your cost savings by investing via Endowus Fund Smart:
Cost saving example through institutional share class
Cost saving example through 100% Cashback, trailer fee rebate
Click here for details on our transparent pricing and how we're fighting for lower and fairer fees. For peace of mind and conflict-free investment solutions, get started with Endowus.
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