- Trailer fees are eating into your fund returns, and you may not know why
- Some banks and fund platforms may be driven to sell the funds that offer them the highest trailer fees, instead of the products most suitable for you
- But here’s an insider secret: unit trust fees can be lowered
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.
As of end-April 2023, Endowus has returned nearly US$5 million in trailer fees paid as 100% cashback to our clients.
Where does this US$5 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-level fee or the total expense ratio (TER) — 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 the TER) 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 near-US$5 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 saved just 1% in fees over 30 years, you would have increased your returns by 280%. So if you had invested $10,000, you could have earned an additional $28,000 in three decades.
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.
Read more: Understand the 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.
To find out more about the costs of unit trusts vs ETFs and other differences between the two, click here.
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.
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.
Next on the Endowus Fin.Lit Academy
Read the next article in the curriculum: Don't fear the markets
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