Trail commission

 Trail Commission

Trailing commissions can be a smart method to keep an adviser motivated to manage your money and produce high returns. Still, evaluating your cost-benefit ratio is crucial to decide whether continuing to pay these expenses is worthwhile. 

Today, numerous methods exist to invest your money and generate a high return without paying expensive trailing commissions; effective choices include low-cost mutual funds, Robo-advisors, and exchange-traded funds (ETFs). 

What is a trail commission? 

It is an annual cost that you pay to a financial advisor while you own an investment and is known as a trailing commission. A trailing commission is intended to encourage an advisor to assess a client’s holdings and offer guidance. It effectively serves as a perk for sticking with a specific fund. 

A financial advisor receives trailing commissions as compensation for reviewing and advising a client’s investment portfolio. You can examine the prospectus for the fund or ask your financial advisor if you are paying trailing commissions and, if so, how much they are costing you. Although trailing commissions differ, they typically range from 0.25 to 1% of the total investment each year. 

Trail commission

Understanding trail commission 

A commission given to advisors or other parties after an investment is known as a trail commission. Discount brokers frequently assess this form of charge online and offline. It is typically structured as a tiny percentage of the annual commission linked with the investment. If so, the commission is calculated until the investor decides to sell. 

Even while a trail commission’s actual value is fairly small, it can nonetheless be quite profitable for a broker or adviser that works with lots of clients who buy investments in huge quantities. The adviser can generate a consistent income stream that aids in supporting the brokerage while actively searching for new clients, provided that the investors keep their assets for at least three to five years. As more and more brokers charge small up-front costs when a transaction is brokered, the significance of the trail commission has grown in recent years. 

Calculation of trail commission 

The trail commission ranges from 0.25 to 0.75 percent annually for equity funds. Fund advisors only receive trail commission for their commission on debt funds. 

Trail commission calculation: 

                                                                        Rate           1 

Trail commission =    Daily product x ———— x ———— 

                                                                         100           365 

Daily product = balance units x cumulative NAV 

For instance, broker X purchases 100,000 units on January 1, 2023, and the investor redeems 50,000 units on March 15, 2023, both of which are subject to a monthly commission of 0.50%. The sum of all the NAV from the first of the month to the end of the month is called cumulative NAV, and it is 1,500 USD in January, 1,256.54 USD in February, 624.00 USD in March (cumulative up to the March 14), and 598.24 USD from the 15th to the 31st. 

Justifications for trailing commission 

Many investors believe that trailing commissions are unjust, although certain arguments exist. An advisor should not receive revenue from a trailing commission in exchange for doing nothing. The advisor should review your investments and should also give you recommendations. 

Theoretically, trailing commissions encourage the advisor to keep you in profitable investments. Bear markets can be discouraging, so trailing commissions incentivize your adviser to keep you fully committed. 

Avoiding trailing commission 

With marketplaces continuing to expand, trailing commissions are becoming less common and simpler to defend. There are several mutual funds without trailing commissions and many exchange-traded funds (ETFs) with low charges. There are even some mutual funds with low charges but high returns. 

Eliminating trailing commissions is one way to cut back on high mutual fund costs. Since cost-cutting is the only surefire way to boost revenues, mutual funds and hedge funds must take particular steps to justify greater fees. 

Frequently Asked Questions

An upfront commission is paid to the broker or mutual fund distributor on the same month the mutual fund investments are purchased. A trail commission is paid every year until the investment is withdrawn. 

With trail commission, the agent earns a percentage of the total sale price of the property, typically 1-2%, after the sale is completed. On the other hand, upfront commission is earned at the time of the sale and is typically a lower percentage of the sale price, around 0.5-1%. 

If you invest in an equity scheme through a mutual fund distributor, the fund house will pay the distributor the trailing commission each year for as long as you keep your investment in the fund. 

Investors should also be aware that the trailing commission is already considered in the fund’s expense ratio, so it is not a hidden cost. The investors won’t incur any more costs as a result. This commission is due to the intermediary from the fund house. 

Liquidity refers to a company’s capacity to sell assets for cash or get funds to cover short-term liabilities or obligations through a loan or cash in the bank. The trailing commission, on the other hand, is a regular payment for the assistance and advice your agent and their business provide. Trailing commissions are paid out of the fund’s management fee. 

Trailing commissions may make sense for funds focusing on illiquid investments such as unlisted enterprises, direct real estate holdings, and frontier markets. These assets are not accessible in the US stock market and have better returns, but they are more expensive to purchase and sell. 

The trail commission for mutual funds differs between equities and debt funds. It can range from 0.20% to 1% in equities mutual funds. This charge might range between 0.10% and 1% for debt fund investments. The trailing commission is determined as a percentage of the total amount invested in a fund by a certain intermediary. It is computed every day and paid once a quarter. As a result, the bigger the investment brought to a fund by an intermediary, the higher the trailing commission. 

Investors should also be aware that the trailing charge is not a hidden cost because it is already reflected in the fund’s expense ratio. As a result, it is not an additional expenditure for the investors. The fund house is accountable for paying the intermediary’s commission. 

Related Terms

    Read the Latest Market Journal

    What is CFD? With 2 Practical Examples

    Published on May 15, 2024 81 

    In this article, you will learn what CFD (Contract for Difference) is, the costs and...

    What is ESG investing, and why is it important?

    Published on May 15, 2024 67 

    Over the last five years, Environmental, Social, and Governance (ESG) investing has evolved from being...

    What are fixed-income funds?

    Published on May 15, 2024 38 

    In the diverse world of unit trusts, various funds employ distinct investment strategies aligned with...

    Hong Kong Value Stocks Q2 2024

    Published on May 14, 2024 100 

    After a long period of sluggishness, Hong Kong market has begun to pick up. The...

    Weekly Updates 13/5/24 – 17/5/24

    Published on May 13, 2024 44 

    This weekly update is designed to help you stay informed and relate economic and company...

    The 5 Levels of Mindset to Achieve FIRE

    Published on May 9, 2024 116 

    Imagine a life where you feel financially secure, confident, and at peace. A life where...

    Weekly Updates 6/5/24 – 10/5/24

    Published on May 6, 2024 71 

    This weekly update is designed to help you stay informed and relate economic and company...

    Weekly Updates 29/4/24 – 3/5/24

    Published on Apr 29, 2024 40 

    This weekly update is designed to help you stay informed and relate economic and company...

    Contact us to Open an Account

    Need Assistance? Share your Details and we’ll get back to you

    IMPORTANT INFORMATION

    This material is provided by Phillip Capital Management (S) Ltd (“PCM”) for general information only and does not constitute a recommendation, an offer to sell, or a solicitation of any offer to invest in any of the exchange-traded fund (“ETF”) or the unit trust (“Products”) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. You should read the Prospectus and the accompanying Product Highlights Sheet (“PHS”) for key features, key risks and other important information of the Products and obtain advice from a financial adviser (“FA“) pursuant to a separate engagement before making a commitment to invest in the Products. In the event that you choose not to obtain advice from a FA, you should assess whether the Products are suitable for you before proceeding to invest. A copy of the Prospectus and PHS are available from PCM, any of its Participating Dealers (“PDs“) for the ETF, or any of its authorised distributors for the unit trust managed by PCM.  

    An ETF is not like a typical unit trust as the units of the ETF (the “Units“) are to be listed and traded like any share on the Singapore Exchange Securities Trading Limited (“SGX-ST”). Listing on the SGX-ST does not guarantee a liquid market for the Units which may be traded at prices above or below its NAV or may be suspended or delisted. Investors may buy or sell the Units on SGX-ST when it is listed. Investors cannot create or redeem Units directly with PCM and have no rights to request PCM to redeem or purchase their Units. Creation and redemption of Units are through PDs if investors are clients of the PDs, who have no obligation to agree to create or redeem Units on behalf of any investor and may impose terms and conditions in connection with such creation or redemption orders. Please refer to the Prospectus of the ETF for more details.  

    Investments are subject to investment risks including the possible loss of the principal amount invested. The purchase of a unit in a fund is not the same as placing your money on deposit with a bank or deposit-taking company. There is no guarantee as to the amount of capital invested or return received. The value of the units and the income accruing to the units may fall or rise. Past performance is not necessarily indicative of the future or likely performance of the Products. There can be no assurance that investment objectives will be achieved.  

    Where applicable, fund(s) may invest in financial derivatives and/or participate in securities lending and repurchase transactions for the purpose of hedging and/or efficient portfolio management, subject to the relevant regulatory requirements. PCM reserves the discretion to determine if currency exposure should be hedged actively, passively or not at all, in the best interest of the Products.  

    The regular dividend distributions, out of either income and/or capital, are not guaranteed and subject to PCM’s discretion. Past payout yields and payments do not represent future payout yields and payments. Such dividend distributions will reduce the available capital for reinvestment and may result in an immediate decrease in the net asset value (“NAV”) of the Products. Please refer to <www.phillipfunds.com> for more information in relation to the dividend distributions.  

    The information provided herein may be obtained or compiled from public and/or third party sources that PCM has no reason to believe are unreliable. Any opinion or view herein is an expression of belief of the individual author or the indicated source (as applicable) only. PCM makes no representation or warranty that such information is accurate, complete, verified or should be relied upon as such. The information does not constitute, and should not be used as a substitute for tax, legal or investment advice.  

    The information herein are not for any person in any jurisdiction or country where such distribution or availability for use would contravene any applicable law or regulation or would subject PCM to any registration or licensing requirement in such jurisdiction or country. The Products is not offered to U.S. Persons. PhillipCapital Group of Companies, including PCM, their affiliates and/or their officers, directors and/or employees may own or have positions in the Products. Any member of the PhillipCapital Group of Companies may have acted upon or used the information, analyses and opinions herein before they have been published. 

    This advertisement has not been reviewed by the Monetary Authority of Singapore.  

     

    Phillip Capital Management (S) Ltd (Co. Reg. No. 199905233W)  
    250 North Bridge Road #06-00, Raffles City Tower ,Singapore 179101 
    Tel: (65) 6230 8133 Fax: (65) 65383066 www.phillipfunds.com