IFC Mutual Fund Fees and Services 3 — Questions and Answers
Question 1: A mutual fund charges a 2% short-term trading fee on redemptions made within 90 days of purchase. What is the primary purpose of this fee?
- To generate additional revenue for the fund company
- To discourage frequent trading that can harm long-term investors (Correct answer)
- To compensate the advisor for the early redemption
- To cover the cost of regulatory filings
Correct answer: To discourage frequent trading that can harm long-term investors
Short-term trading fees are designed to discourage market timing and frequent trading, which raises transaction costs and can disadvantage long-term investors.
Question 2: Under the 'no-load' purchase option, how does a fund dealer typically earn compensation?
- By charging a front-end sales commission directly to the client
- By collecting trailer fees paid by the fund company from the MER (Correct answer)
- By charging an annual account maintenance fee separate from the fund
- No-load funds offer no compensation to dealers
Correct answer: By collecting trailer fees paid by the fund company from the MER
No-load funds do not charge sales commissions, but dealers still receive ongoing trailer fees embedded in the fund's MER as compensation for servicing clients.
Question 3: A DSC fund allows clients to redeem up to 10% of their units annually without triggering a DSC fee. This provision is commonly called:
- The free redemption allowance
- The systematic withdrawal privilege
- The 10% free redemption right (Correct answer)
- The liquidity exemption clause
Correct answer: The 10% free redemption right
Most DSC fund companies offer a 10% free redemption right, allowing clients to redeem up to 10% of their holdings annually without incurring DSC charges.
Question 4: Which of the following services is most commonly offered by mutual fund companies through a dealer's account platform?
- Direct investment in individual stocks and bonds
- Automatic rebalancing to a fixed asset allocation using proprietary algorithms
- Systematic investment plans (SIPs) for regular automatic contributions (Correct answer)
- Guaranteed capital protection on all fund investments
Correct answer: Systematic investment plans (SIPs) for regular automatic contributions
Systematic investment plans allow clients to make regular automated contributions to their mutual funds, making investing disciplined and convenient.
Question 5: The fund facts document must be delivered to a client:
- Only upon the client's written request
- Before or at the point of sale of the mutual fund (Correct answer)
- Within 30 days after the initial purchase
- Annually, at the end of each fiscal year
Correct answer: Before or at the point of sale of the mutual fund
Regulations require that the Fund Facts document be delivered to the client before or at the point of sale so they can make an informed investment decision.
Question 6: A client is invested in a mutual fund with a 1.00% management fee. The total MER is 2.25%. What accounts for the difference?
- The deferred sales charge schedule accrued monthly
- Operating expenses, taxes, and other fund costs beyond the management fee (Correct answer)
- The front-end sales commission charged on each new purchase
- The advisor's annual financial planning fee billed separately
Correct answer: Operating expenses, taxes, and other fund costs beyond the management fee
The MER includes the management fee plus operating expenses (legal, audit, administration), taxes (GST/HST), and other fund costs, which together exceed the base management fee.
Question 7: Which scenario correctly describes how a fund-of-funds structure can affect fees?
- Investors in a fund-of-funds pay only the MER of the top fund, avoiding underlying fund fees
- Investors may effectively pay fees at both the top fund level and the underlying fund level (Correct answer)
- Fund-of-funds are required by regulation to charge lower fees than single-strategy funds
- The MER of a fund-of-funds is capped at 1.5% regardless of underlying fund costs
Correct answer: Investors may effectively pay fees at both the top fund level and the underlying fund level
In a fund-of-funds structure, investors bear the MER of the top fund plus the MERs of the underlying funds, potentially resulting in layered fees.
IFC Mutual Fund Fees and Services 3
A mutual fund charges a 2% short-term trading fee on redemptions made within 90 days of purchase.
What is the primary purpose of this fee?