How do 'trailer fees' (service fees) apply to mutual funds?

Question: How do 'trailer fees' (service fees) apply to mutual funds?

Answer options:

• They are one-time fees paid upfront when purchasing fund units.
• They are fees paid by the client directly to the fund manager for performance. ✅ They are ongoing fees paid by the fund company to the dealer and representative for continuing service to the client.
• They are charged only when a client redeems their fund units.

Correct answer: They are ongoing fees paid by the fund company to the dealer and representative for continuing service to the client.

Explanation: Trailer fees, also known as service fees or embedded commissions, are an ongoing payment made by the mutual fund company to the dealer firm, which then typically compensates the representative. These fees compensate for ongoing service, advice, and administration. They are embedded in the MER.