Trailer fees are eating into your fund returns and you may not know why
WHEN you buy a cup of coffee, an office outfit, or a new phone, they all have an advertised price tag. You should know exactly what you’re paying for.
We can’t say the same for the fees behind your fund investments. That has real financial consequences, and we have the numbers to speak for that.
By the end of June 2022, the tally of fees saved by clients investing through Endowus since it offered retail services had crossed $3 million.
This “cashback” can buy you a luxury condo unit, or some 500,000 cups of Starbucks coffee.
Where does this $3 million come from?
That’s roughly all the money that traditional fund distributors would earn if they had sold the same funds to our clients.
Why you’re overpaying
Most unit trust investors are used to reviewing the headline fee alone.
This is known as the fund management fee or the total expense ratio — it ranges from under 1% to 2%.
The everyday fund investor pays this every year; they may be desensitised to this annual investment cost because this fee range has been the norm for decades.
But here’s an insider secret: unit trust fees can be lowered.
Fund managers earn this management fee from investors. They then pass down some of these fees to the fund distributors for selling these funds.
Now, as much as half of these headline fees go to fund distributors.
These are called trailer fees.
And that’s the $3 million we’ve saved on behalf of clients, by returning such fees back to you.
What’s also not calculated here is the missed opportunity cost.
If you had invested between 1988 and 2021 and put that “cashback” to work in the markets instead of paying it to fund distributors, you would have earned another 290%. So $12,000 in 1998 should have snowballed to more than $100,000 by 2021 (or 780% in total returns).
What’s troubling is that most investors can’t tell that they’ve paid that fee to distributors in the first place, unless they know where to find this fee breakdown.
We've also compiled a list of terms commonly associated with investing in unit trusts.
Goodbye trailer fees, conflict of interest
Not only are these fees eating into your returns, they also don’t work in your favour.
The biggest problem posed by trailer fees is that a distributor is wrongly incentivised.
Banks and fund platforms may be driven to sell the funds that offer the highest trailer fees to them. Instead, they should be motivated to sell the most suitable products for you, based on your risk profile and investment needs.
Fund managers are in turn pressured to keep their fees high so they can afford to keep paying and incentivising distributors to sell their funds.
What adds to the lack of transparency is that you can’t see the trailer fees being deducted from your investments directly.
Instead, every year, the net asset value of your funds is reduced by such fees.
That’s why platforms that sell funds with no sales charges and platform fees are still making money. It's from trailer fees that are coming from your fund's returns.
Trailer fees give unit trusts a bad name
Such fees have for some years now clouded our judgement in deciding between exchange traded funds (ETFs) and unit trusts (or mutual funds as they are known in the US).
ETFs are funds invested in a portfolio of companies, and are traded on the stock exchange. Investors are used to ETF fees of 0.5% and below. Often, the management fees shrink as fund size scales up.
This management fee charged to investors paints unit trusts as the poorer cousins of ETFs. What we’re saying instead, is that a face-value comparison is unfair because of what the management fee truly comprises.
Another insider secret is that several funds are constructed with different tiers or classes. Institutional investors access the funds at lower costs than retail investors.
As it turns out, these cheaper classes of funds can be sold to retail investors too. If available, Endowus offers those classes of funds to our clients.
If not, then any trailer fee we earn is returned to the investors.
The odds have been stacked against retail investors for some time now.
Endowus earns a fee that we make clear as the price tag for access to these funds. But we have avoided the age-old misaligned interests between retail investors and fund distributors.
We want to stay independent to recommend low-cost solutions that best suit your needs, and that lets you keep the returns that rightfully belong to you.
This helps us commit to your long-term financial well-being.
Investment involves risk. The value of investments and the income from them can go down as well as up, and you may not get the full amount you invested. Past performance is not an indicator nor a guarantee of future performance. Rates of exchange may cause the value of investments to go up or down. Individual stock performance does not represent the return of a fund.
Any forward-looking statements, prediction, projection or forecast on the economy, stock market, bond market or economic trends of the markets contained in this material are subject to market influences and contingent upon matters outside the control of Endow.us Pte. Ltd (“Endowus”) and therefore may not be realised in the future. Further, any opinion or estimate is made on a general basis and subject to change without notice. In presenting the information above, none of Endowus Pte. Ltd., its affiliates, directors, employees, representatives or agents have given any consideration to, nor have made any investigation of the objective, financial situation or particular need of any user, reader, any specific person or group of persons. Therefore, no representation is made as to the completeness and adequacy of the information to make an informed decision. You should carefully consider (i) whether any investment views and products/ services are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances. You may also wish to seek financial advice through a financial advisor or the Endowus platform and independent legal, accounting, regulatory or tax advice, as appropriate.