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Introduction and Overview of 40 Act Liquid Alternative Funds
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17
Mutual Fund Share Classes
There are several classes of shares in the mutual fund
industry, each of which has different fee implications.
To better understand these share classes, we have
outlined the various types of fees that can be applied
to a mutual fund.
Listing Fees:
For certain share classes, there
is a one-time listing fee that an IM pays to the
distributor of its product to be included on the
distributor’s product platform.
Management Fees:
The management fee is paid
annually to the IM (and its affiliates) for overseeing
the fund’s portfolio and may be split with the IAs.
Depending on the arrangement the manager has
negotiated with its distributor, this fee can range
from 50 to 150 basis points. This management fee
is deducted from the fund’s assets.
Platform Fees:
Independent broker-dealers and
registered investment advisers (RIAs) charge a
platform fee of 40 basis points that is paid directly
from the fund’s assets annually for administering
and overseeing the fund.
Marketing Fees:
If the mutual fund is being sold
to a non-institutional investor, it also can charge
a “marketing” fee or 12(b)-1 fee that covers
distribution expenses, such as compensating a
broker or others that sell fund shares and paying
for marketing and printing costs related to the
fund filings. An investment adviser must file a
12(b)-1 plan to collect these fees. The SEC does
not have a limit on such fees, but FINRA has said
that the fee cannot exceed 0.75% of the fund’s
average net assets per year. Another type of
marketing fee that can be assessed by a manager
is a shareholder services fee. FINRA limits this
fee to 0.25% of the fund’s average net assets per
year. This fee can be collected as part of the 12(b)-1
expenses if it is included in the marketing plan; or,
if there is no plan filed, it can be collected under
the category of other expenses. Marketing fees
are paid annually and deducted from the fund’s
overall holdings.
Trailer Fees:
Depending upon the distributor,
there can sometimes be a trailer fee associated
with a mutual fund. A trailer fee is an ongoing
annual fee that the fund manager pays to the
distributor of its mutual fund that remains
in effect for as long as the client holds the
mutual fund
Load Fees:
Load fees are less common today, but
still persist for many fund offerings. Load fees are
a sales charge that is typically paid to an outside
broker that distributes a mutual fund offering.
The SEC does not limit the size of the load a fund
many impose, but FINRA has limited the charge
to 8.5%. This is a maximum level and if the fund
charges other types of fees, the cumulative set
of fees cannot exceed this level. There are two
types of loads. A front-end sales load is charged
when an investor purchases a fund. The amount
of the load is paid prior to purchasing the shares
of the mutual fund and thus reduces the size of
the buyer’s purchase. There is also a deferred,
or back-end, sales load that gets charged when
an investor liquidates its investment. The load
is subtracted from the value of either the fund’s
initial purchase or the liquidation proceeds,
depending on which is smaller.
Redemption Fees:
The redemption fee is deducted
from the sales proceeds of the mutual fund,
much like the deferred sales load fees, but it is
applied differently. The deferred sales load fee
is used to pay brokers that distribute the fund.
The redemption fee is instead paid directly
to the investment adviser to help cover the
costs of redeeming the fund shares. The SEC
limits redemption fees to no more than 2% of the
fund’s value.
Combinations of these different fees are used in
creating the various share classes we will now discuss.
Section V: Marketing and Distributing
40 Act Liquid Alternative Funds