A mutual fund has an annual Management Expense Ratio (MER) of 2.00%, which includes a trailer fee. If the fund's management fee is 1.75% and its operating expenses are 0.10%, what is the maximum annual trailer fee percentage that could be paid from this fund?

Question: A mutual fund has an annual Management Expense Ratio (MER) of 2.00%, which includes a trailer fee. If the fund's management fee is 1.75% and its operating expenses are 0.10%, what is the maximum annual trailer fee percentage that could be paid from this fund?

Answer options:

• 0.25% ✅ 0.15%
• 0.05%
• 0.00%

Correct answer: 0.15%

Explanation: The trailer fee is typically paid out of the management fee. However, the question states the MER 'includes' the trailer fee. Since MER = Management Fee + Operating Expenses + Taxes (if not included in other components) and trailer fees are part of the management fee, we assume the MER given is total. If the MER is 2.00% and the management fee component that includes the trailer is 1.75%, and other operating expenses are 0.10%, then the non-trailer portion of operating expenses is 0.10%. The trailer fee is implicitly part of the management fees. In the context of MER calculation, if MER = Management Fee + Other Fund Costs, and the management fee is 1.75% (which includes the trailer), and operating expenses are 0.10%, the total expenses for 2.00% MER means 2.00% - 0.10% (operating) = 1.90% is available for management fee and trailer. If the management fee itself is 1.75%, and that 1.75% includes the trailer, then the question is slightly ambiguous. However, if the stated management fee before considering the trailer contribution is 1.75%, and the MER is 2.00% (which explicitly includes the trailer), then the portion of the MER attributable to other direct fund operating expenses (excluding the management fee, but including general fund costs) is 0.10%. Thus, the trailer fee element within the management fee cannot exceed what remains after core expenses and the non-trailer portion of the management fee are accounted for. Given the structure of MERs for mutual funds, the trailer fee often represents a portion of the management fee. If the stated MER is 2.00%, and operating expenses are 0.10%, then the net cost attributed to management (inclusive of trailer) is 1.90%. If the stated management fee is 1.75% and the MER is 2.00% (which means it's 1.75% management fee + 0.10% operating expenses + 0.15% other expenses or a further breakdown), then if the 1.75% management fee includes the trailer, we cannot deduce the trailer. However, if the 1.75% is the 'gross' management fee FROM WHICH the trailer is paid FROM, and operating expenses are standalone, and MER is total, then 2.00% (MER) = 1.75% (Management Fee) + 0.10% (Operating Expenses) + X (Trailer). This isn't how MERs are typically broken down. Let's reinterpret: MER = Management Fee + Fund Operating Expenses (excluding management fee). If the MER (2.00%) includes the trailer fee, and the management fee itself (1.75%) is the fee from which the trailer is paid, then the 'other' operating expenses are 0.10%. Therefore, the trailer fee cannot exceed 2.00% (total MER) - 1.75% (management fee, potentially including trailer) - 0.10% (operating expenses). This interpretation would lead to 0.15%. Standard practice indicates trailer fees are typically a component of the management fee. If the MER is 2.00%, and operating expenses are 0.10%, then the management fee (including the trailer) is 1.90% (2.00% - 0.10%). If the question states the management fee is 1.75%, this implies the MER is composed of 1.75% (management fee) + 0.10% (operating expenses) + X. Then X, or what completes the MER, would be 0.15%. This is the trailer portion. The question can be challenging due to implicit assumptions about MER breakdown vs. management fee. But assuming MER = Management Fee + Other Expenses, and given MER = 2.00%, Management Fee = 1.75%, Operating Expenses = 0.10% implies an additional 0.15% to reach the MER, which is the trailer, as the MER is said to include it. The most plausible interpretation is that the 1.75% is the base management fee before considering the trailer, and the MER of 2.00% represents the sum of the management fee (which has a trailer component within it) and all other fund operating expenses. If 1.75% is the fund's management fee and 0.10% are operating expenses, then the total of these is 1.85%. If the total MER is 2.00%, then the remaining 0.15% must be attributed to the trailer fee component that pushes the 'management fee' portion of the MER up to account for the trailer. If the 1.75% ALREADY includes the trailer, then the remaining is 0.15% (2.00 - 1.75 - 0.10). The most logical interpretation in IFIC rules context is that the trailer is an amount paid out of the fund, typically from the management fee component of the MER. So, if MER is 2.00%, and operating expenses are 0.10%, then total management-related costs (including trailer) are 1.90%. If the base management fee (before trailer consideration) is 1.75%, then the trailer fee is 1.90% - 1.75% = 0.15%.