IFC Mutual Fund Fees and Services 2 — Questions and Answers
Question 1: A client redeems their mutual fund units after holding them for only 6 months under a deferred sales charge (DSC) schedule. What is the likely outcome?
- No redemption fee applies since the holding period exceeds 90 days
- A redemption fee is charged based on the DSC schedule, typically highest in early years (Correct answer)
- The fund company waives fees for redemptions under $5,000
- The client receives a full refund including all previously paid MER
Correct answer: A redemption fee is charged based on the DSC schedule, typically highest in early years
DSC schedules impose redemption fees that are highest in the early years and decline annually, so a 6-month redemption would trigger a significant fee.
Question 2: Which of the following best describes a trailing commission (trailer fee)?
- A one-time fee paid when a fund is first purchased
- An ongoing fee paid by the fund company to the dealer for servicing client accounts (Correct answer)
- A fee charged when a client switches between fund families
- A penalty fee for early redemption of fund units
Correct answer: An ongoing fee paid by the fund company to the dealer for servicing client accounts
Trailing commissions are ongoing payments from the fund company to the dealer/advisor as compensation for continued client servicing and advice.
Question 3: Under the low-load (LL) sales charge option, redemption fees typically apply for how long after purchase?
- Up to 7 years
- Up to 10 years
- Up to 2 to 3 years (Correct answer)
- There are no redemption fees under the low-load option
Correct answer: Up to 2 to 3 years
Low-load funds typically have a short DSC schedule of 2 to 3 years, compared to the standard DSC schedule of up to 7 years.
Question 4: A mutual fund's management expense ratio (MER) is 2.5%. What does this figure represent?
- The sales commission paid to the advisor at time of purchase
- The total annual cost of the fund expressed as a percentage of average net assets (Correct answer)
- The penalty fee applied on early redemption
- The percentage of fund assets held in cash reserves
Correct answer: The total annual cost of the fund expressed as a percentage of average net assets
The MER is the total annual cost of running the fund — including management fees, operating expenses, and taxes — expressed as a percentage of average net assets.
Question 5: Which type of mutual fund fee is negotiable between the client and the advisor at the time of purchase?
- Management expense ratio (MER)
- Deferred sales charge (DSC)
- Front-end sales charge (FE) (Correct answer)
- Trailing commission
Correct answer: Front-end sales charge (FE)
The front-end load is negotiable between the advisor and client, and can range from 0% to the maximum allowed (typically up to 5% or 6%).
Question 6: A client wants to switch from one fund to another within the same fund family under a DSC schedule. What typically happens to the DSC clock?
- The DSC clock resets to zero on the date of the switch
- The original purchase date is retained and the DSC clock continues from there (Correct answer)
- The switch triggers immediate payment of all remaining DSC fees
- Switches within a fund family are not permitted under DSC
Correct answer: The original purchase date is retained and the DSC clock continues from there
Most fund companies allow switches within the same family without triggering DSC fees or resetting the clock, so the original purchase date is preserved.
Question 7: Which of the following costs is NOT typically included in a mutual fund's MER?
- Investment management fees
- Audit and legal fees of the fund
- Brokerage commissions paid to execute portfolio trades (Correct answer)
- HST/GST charged on the management fee
Correct answer: Brokerage commissions paid to execute portfolio trades
Brokerage commissions on portfolio trades are typically reported separately as the trading expense ratio (TER), not included in the MER.
IFC Mutual Fund Fees and Services 2
A client redeems their mutual fund units after holding them for only 6 months under a deferred sales charge (DSC) schedule.
What is the likely outcome?