Interval Funds

Apr 16. 19:06

Interval Fund Essentials: Fees

Photo by Ibrahim Rifath

Different funds have different fees, and they can add up. Here’s what every investor should know about the charges you might encounter.


SALES CHARGE

This fee, also called the “front-end load,” is an initial charge applied at the time a person purchases a fund’s shares. It’s charged as a percent of the total amount being invested, and it’s paid to the financial intermediaries that facilitate the sale to cover their operating costs. The size of this fee varies considerably, but it’s usually less than 5% of the amount a person is investing.

BROKER COMMISSION

A broker commission is a specific type of sales charge that is paid to the broker, who acts as an intermediary between the person purchasing the shares and the securities exchange where the shares are listed. Commonly used brokers are TD Ameritrade, Fidelity, and Charles Schwab. Since the late 2010s, most brokerages have stopped charging fees for purchasing securities, making broker commissions increasingly rare.

ADVISORY FEE

Advisor fees, also called “management fees,” are paid to the fund’s advisors, usually as a percentage of the total dollar value of the assets the fund manages. This fee covers the salaries of the fund’s employees, as well as any overhead involved in research and operations. The size of this fee varies, but it’s usually between 0.5% and 2% of total assets.

REPURCHASE FEE

This fee -- also called the “back-end load,” the “deferred sales charge,” or the “redemption fee” -- is applied when the interval fund repurchases shares from the investor during the repurchase period. This fee can’t exceed 2% of the total proceeds of the sale, and it’s uncommon for an interval fund to charge any repurchase fee at all.

EARLY REPURCHASE FEE

The early repurchase fee or "early withdrawal fee," which is more common than the regular repurchase fee, is applied when investors sell their shares back to the interval fund before they’ve held them for a given amount of time – usually a year. It exists to incentivize investors to hold their shares for the longer period of time necessary to see significant yield, and to compensate the fund for the difficulty of liquidating some of its holdings. This fee, combined with the regular repurchase fee, can’t exceed 2%.

12B-1 FEE

12B-1 fees, named after the SEC code that allows them, encompass both service fees and distribution fees (explained below). The fund’s summary of fees may roll both into one “12B-1 fee” category, or it may break the fee down into its constituents.

SERVICE FEE

The service fee, sometimes called the “shareholder servicing fee,” is occasionally rolled into “12B-1 fees” category. The service fee covers the costs associated with responding to general inquiries and shareholder requests for information. It’s usually less than 1%.

DISTRIBUTION FEE

The distribution fee, also occasionally rolled into the “12B-1 fees” category, covers the cost of marketing and selling shares, printing and sending materials to investors, and general advertisement. Like the service fee, it’s usually less than 1%.

GROSS EXPENSE RATIO

The gross expense ratio, sometimes called the “audited gross expense ratio” or just the “total operating expenses,” is the total cost of operating the fund divided by the dollar value of the assets the fund manages. This is calculated to include all of the abovementioned fees, plus any additional expenses the fund may have incurred. It doesn’t include the rebates to shareholders that the fund may give through fee waivers or expense reimbursements. The size of this fee varies considerably based on the fund’s performance.

NET EXPENSE RATIO

The net expense ratio, sometimes called the “net operating expenses,” is the figure that actually reflects how much investors are paying to keep their money in a fund. It is calculated as a percentage of total assets under management after fee waivers and reimbursements are factored in, so the net expense ratio percentage reflects how much of an investor’s money is being paid to the fund. For interval funds, you can expect this figure to be between 1% and 5%.


Next: Interval Fund Essentials: Key Forms

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