IFC Mutual Fund Fees and Services 5 — Questions and Answers
Question 1: A mutual fund company charges a 'setup fee' of $150 when a client opens a new registered account. This fee is best categorized as:
- Part of the fund's MER
- An account administration fee separate from investment management costs (Correct answer)
- A deferred sales charge collected upfront
- A trailing commission billed annually
Correct answer: An account administration fee separate from investment management costs
Account setup and administration fees are separate from the fund's MER and are charged by the dealer or fund company for account maintenance services.
Question 2: An investor holds 1,000 DSC fund units currently worth $20 per unit. The DSC schedule shows a 3% fee still applies. How much would the DSC fee be on a full redemption?
- $30
- $600 (Correct answer)
- $60
- $300
Correct answer: $600
DSC fees are calculated on the redemption value: 1,000 units × $20 = $20,000, and 3% of $20,000 = $600.
Question 3: The Fund Facts document must include which of the following cost-related disclosures?
- The fund manager's personal compensation details
- The sales charges, ongoing fund expenses, and impact of costs on a $1,000 investment (Correct answer)
- The projected future MER based on expected asset growth
- The brokerage commissions earned by each portfolio trade
Correct answer: The sales charges, ongoing fund expenses, and impact of costs on a $1,000 investment
Fund Facts must clearly disclose sales charges, the MER, and a standardized example showing the cost impact on a hypothetical $1,000 investment over 1, 3, 5, and 10 years.
Question 4: Which of the following mutual fund purchase options would result in the lowest immediate out-of-pocket cost to a client at the time of investment?
- Front-end load at 5%
- Front-end load at 2%
- Deferred sales charge (DSC) (Correct answer)
- No-load fund with a 2.5% MER
Correct answer: Deferred sales charge (DSC)
Under DSC, no sales commission is paid at purchase — the full investment amount goes to work immediately, with fees only applying if the client redeems early.
Question 5: A fund company offers a 'PAC' (pre-authorized chequing) service. What is its primary benefit to investors?
- It guarantees a minimum return of the investor's contributions
- It automates regular contributions, enabling dollar-cost averaging discipline (Correct answer)
- It eliminates all sales charges on purchases made through the plan
- It converts the investor's holdings to a segregated fund after five years
Correct answer: It automates regular contributions, enabling dollar-cost averaging discipline
PAC plans automate regular contributions to a mutual fund, promoting disciplined saving and naturally implementing dollar-cost averaging over time.
Question 6: When comparing mutual fund share classes (e.g., Series A vs. Series F), the primary difference is typically found in:
- The underlying portfolio holdings and investment strategy
- The distribution of fees — specifically whether trailer commissions are included in the MER (Correct answer)
- The minimum investment required to access the fund
- The portfolio manager responsible for managing assets
Correct answer: The distribution of fees — specifically whether trailer commissions are included in the MER
Series A includes trailer commissions in the MER for advisor compensation, while Series F strips out the trailer for fee-based accounts — the portfolio and strategy are otherwise identical.
Question 7: A client complains that their mutual fund's rate of return shown on their statement differs from the fund's published performance. The most likely cause is:
- The fund company is reporting incorrect performance data
- The client's personal rate of return reflects their individual timing of contributions and withdrawals (Correct answer)
- The fund's MER was applied incorrectly by the dealer
- Published performance always includes sales charges while client statements exclude them
Correct answer: The client's personal rate of return reflects their individual timing of contributions and withdrawals
A client's personal rate of return is affected by when they invested and withdrew money, which can differ significantly from the fund's time-weighted return published for all investors.
IFC Mutual Fund Fees and Services 5
A mutual fund company charges a 'setup fee' of $150 when a client opens a new registered account.
This fee is best categorized as: