SEGREGATED FUNDS AND ANNUITIES ANSWERS
AND QUESTIONS SET A+
✔✔What are three types of fees charged by Mutual Funds
LLQP - SFA VL 03 - ✔✔1. Load Fees (also referred to as commissions)
1. Trailer fees
3. Management Fees
✔✔Load Fees
LLQP - SFA VL 03 - ✔✔A "Load Fee" is a commission charged upon purchase or
redemption, but never on both.
Three types of load fees:
1. No load Funds:
it is fund that doesn't charge
commission at all. It's usually proprietary
fund issued by bank
2. Front End Load Funds:
Commission/fee charged upon
purchase and added to the purchase
amount.
3. Back End Load Funds:
commission/fee charged upon
redemption.For example if you make a withdraw in year 1, the load fee is quit high (i.e.
7%). The longer you have that fund, that fee is reduced to the point you can redeem
your units no back load fee would applied (i.e. 0% in 8 years)
✔✔Trailer Fees
LLQP - SFA VL 03 - ✔✔- Sales person sell the clients mutual fund, their work does not
stop there.
,- Sales person meets with client on an regular basis usually annual basis to verify the
fund is appropriate continuously .
- Trailer fee is paid to compensate the salesperson for continued service.
- Trailer fees are charged to the fund, which means they are indirectly paid by investors
✔✔Management Fees
LLQP - SFA VL 03 - ✔✔1. All mutual funds have manager and all charge a
management fee
2. Even no load funds charge a management fee, because they have a fund manager
that needs to be compensated.
3. The management fee is known in advance and is disclosed in various disclosure
documents to investors
4. Range from 0.5 % to as high as 3% of the net assets managed per year.
5. Determined by the level of activity the fund manager performs. Actively managed
equity fund where find manager is trying to beat the market is more work for fund
managers than money market fund where managers are following buy and hold strategy
✔✔How are the following fees are collected?
1. Management fee
2. Trailer Fee
3. Front end load (Front-end Sales)
4. Back end load
LLQP - SFA VL 03 - ✔✔1. Management Fee: fees are deducted from assets of fund
which indirectly it's means being paid by unit holders
2. Trailer fee: Deducted from assets of fund.
3. Front end load: Added to purchase price.
4. Deducted from the unit price
✔✔LLQP - SFA VL 04 - ✔✔- Mutual Funds and Segregated Funds use a forward
pricing model.
Backward pricing is prohibited.
For example,
Marmaduke is a brand new race house in her very first race and she is now running
towards the finish line where ahead of the rest. The gambler saw this and went to the
ticket window and says he wants to bet on Marmaduke. he was told "you can't get in on
this race already has already started. you have to wait for the next race"
,Treat each trading date as a mini race and if you want to get in on the middle of the day
you are going to be told the same thing.
✔✔What is Forward Pricing Model
LLQP - SFA VL 04 - ✔✔- Your order will be accepted but will be processed on the next
valuation point.
- If purchasing or redeeming units with this knowledge based on a previous price which
is prohibited, the investors would be an unfair advantage because if you are midway
through the trading date, you know how market is performing. If you can purchase or
redeem your units with that knowledge based on the previous price that would be unfair.
✔✔How are Mutual Fund and Segregated units are sold or redeemed?
LLQP - SFA VL 04 - ✔✔Mutual Fund and Segregated units are sold or redeemed using
a Forward Pricing Model.
✔✔AAA Real Estate fund is valued every Friday @ 6pm EST. Peter placed an order on
Thursday Oct 21.
What NAVPS/NAVPU would Peter's order be filled at?
LLQP - SFA VL 04 - ✔✔Friday October 15th Value (NAVPU) =12.38
->
Thursday October 21st Peterplaces an order. ->
Friday Ptctober 22nd Value (NAVPU)=$12.95
When Peter placed this order on Thursday, it wouldn't be processed immediately. It
would be processed at next valuation point which in this case $12.95.
✔✔How frequently the funds are valued?
LLQP - SFA VL 04 - ✔✔1. Most funds are valued daily (i.e. business days) but some
are valued weekly. For example, valuing real estate funds is a time consuming and
expensive process so some funds are valued less frequently.
✔✔NAVPS
LLQP - SFA VL 04 - ✔✔NAVPS stands for Net Asset Value Per Share or, "NAVPU"
(Net Asset Value Per Unit) is just the fancy name for price per share/unit
, ✔✔What is the difference between NAVP and NAVP
LLQP - SFA VL 04 - ✔✔Appropriate term for Segregated Fund s is Net Asset Value per
Unit (NAVPU).
But for Mutual Funds, sometimes they use Net Asset Value per Share (NAVPS)
✔✔Assets: $10,000,000
Liabilities: $2,000,000
Units outstanding: $500,000
MER: 4.0%
Calculate NAVPU
LLQP - SFA VL 04 - ✔✔MER is the management fee plus operating expenses
expressed as a percentage. Burt we do not need MER for calculating value per unit.
NAVPU= (Assets - Liabilities)/Number of Outsourcing Units.
NAVPU= ($10,000,000 - $$2,000,000)/500,000=$16
✔✔Front-end Sales Charge (Front-end Load)
LLQP - SFA VL 04 - ✔✔1. The commission (load) is added to the purchase price, so
each unit will actually cost more than the NAVPU.
Assume an NAVPU of $20 and front-end load of 4$, each unit would actually cost
$20.83.
2. For each $20.083 paid, only $20 actually gets invested into the fund.
✔✔Can funds charge a commission both upon purchase or redemption?
LLQP - SFA VL 04 - ✔✔No, Funds can charge a commission upon purchase or
redemption, but never on both!
✔✔You are investing the total of $100,00 and there is a 4% front-end load.
How much of it will make into the fund?
LLQP - SFA VL 04 - ✔✔$96,000 (96%) into the Fund.
$4,000 (4%) commission/Load
AND QUESTIONS SET A+
✔✔What are three types of fees charged by Mutual Funds
LLQP - SFA VL 03 - ✔✔1. Load Fees (also referred to as commissions)
1. Trailer fees
3. Management Fees
✔✔Load Fees
LLQP - SFA VL 03 - ✔✔A "Load Fee" is a commission charged upon purchase or
redemption, but never on both.
Three types of load fees:
1. No load Funds:
it is fund that doesn't charge
commission at all. It's usually proprietary
fund issued by bank
2. Front End Load Funds:
Commission/fee charged upon
purchase and added to the purchase
amount.
3. Back End Load Funds:
commission/fee charged upon
redemption.For example if you make a withdraw in year 1, the load fee is quit high (i.e.
7%). The longer you have that fund, that fee is reduced to the point you can redeem
your units no back load fee would applied (i.e. 0% in 8 years)
✔✔Trailer Fees
LLQP - SFA VL 03 - ✔✔- Sales person sell the clients mutual fund, their work does not
stop there.
,- Sales person meets with client on an regular basis usually annual basis to verify the
fund is appropriate continuously .
- Trailer fee is paid to compensate the salesperson for continued service.
- Trailer fees are charged to the fund, which means they are indirectly paid by investors
✔✔Management Fees
LLQP - SFA VL 03 - ✔✔1. All mutual funds have manager and all charge a
management fee
2. Even no load funds charge a management fee, because they have a fund manager
that needs to be compensated.
3. The management fee is known in advance and is disclosed in various disclosure
documents to investors
4. Range from 0.5 % to as high as 3% of the net assets managed per year.
5. Determined by the level of activity the fund manager performs. Actively managed
equity fund where find manager is trying to beat the market is more work for fund
managers than money market fund where managers are following buy and hold strategy
✔✔How are the following fees are collected?
1. Management fee
2. Trailer Fee
3. Front end load (Front-end Sales)
4. Back end load
LLQP - SFA VL 03 - ✔✔1. Management Fee: fees are deducted from assets of fund
which indirectly it's means being paid by unit holders
2. Trailer fee: Deducted from assets of fund.
3. Front end load: Added to purchase price.
4. Deducted from the unit price
✔✔LLQP - SFA VL 04 - ✔✔- Mutual Funds and Segregated Funds use a forward
pricing model.
Backward pricing is prohibited.
For example,
Marmaduke is a brand new race house in her very first race and she is now running
towards the finish line where ahead of the rest. The gambler saw this and went to the
ticket window and says he wants to bet on Marmaduke. he was told "you can't get in on
this race already has already started. you have to wait for the next race"
,Treat each trading date as a mini race and if you want to get in on the middle of the day
you are going to be told the same thing.
✔✔What is Forward Pricing Model
LLQP - SFA VL 04 - ✔✔- Your order will be accepted but will be processed on the next
valuation point.
- If purchasing or redeeming units with this knowledge based on a previous price which
is prohibited, the investors would be an unfair advantage because if you are midway
through the trading date, you know how market is performing. If you can purchase or
redeem your units with that knowledge based on the previous price that would be unfair.
✔✔How are Mutual Fund and Segregated units are sold or redeemed?
LLQP - SFA VL 04 - ✔✔Mutual Fund and Segregated units are sold or redeemed using
a Forward Pricing Model.
✔✔AAA Real Estate fund is valued every Friday @ 6pm EST. Peter placed an order on
Thursday Oct 21.
What NAVPS/NAVPU would Peter's order be filled at?
LLQP - SFA VL 04 - ✔✔Friday October 15th Value (NAVPU) =12.38
->
Thursday October 21st Peterplaces an order. ->
Friday Ptctober 22nd Value (NAVPU)=$12.95
When Peter placed this order on Thursday, it wouldn't be processed immediately. It
would be processed at next valuation point which in this case $12.95.
✔✔How frequently the funds are valued?
LLQP - SFA VL 04 - ✔✔1. Most funds are valued daily (i.e. business days) but some
are valued weekly. For example, valuing real estate funds is a time consuming and
expensive process so some funds are valued less frequently.
✔✔NAVPS
LLQP - SFA VL 04 - ✔✔NAVPS stands for Net Asset Value Per Share or, "NAVPU"
(Net Asset Value Per Unit) is just the fancy name for price per share/unit
, ✔✔What is the difference between NAVP and NAVP
LLQP - SFA VL 04 - ✔✔Appropriate term for Segregated Fund s is Net Asset Value per
Unit (NAVPU).
But for Mutual Funds, sometimes they use Net Asset Value per Share (NAVPS)
✔✔Assets: $10,000,000
Liabilities: $2,000,000
Units outstanding: $500,000
MER: 4.0%
Calculate NAVPU
LLQP - SFA VL 04 - ✔✔MER is the management fee plus operating expenses
expressed as a percentage. Burt we do not need MER for calculating value per unit.
NAVPU= (Assets - Liabilities)/Number of Outsourcing Units.
NAVPU= ($10,000,000 - $$2,000,000)/500,000=$16
✔✔Front-end Sales Charge (Front-end Load)
LLQP - SFA VL 04 - ✔✔1. The commission (load) is added to the purchase price, so
each unit will actually cost more than the NAVPU.
Assume an NAVPU of $20 and front-end load of 4$, each unit would actually cost
$20.83.
2. For each $20.083 paid, only $20 actually gets invested into the fund.
✔✔Can funds charge a commission both upon purchase or redemption?
LLQP - SFA VL 04 - ✔✔No, Funds can charge a commission upon purchase or
redemption, but never on both!
✔✔You are investing the total of $100,00 and there is a 4% front-end load.
How much of it will make into the fund?
LLQP - SFA VL 04 - ✔✔$96,000 (96%) into the Fund.
$4,000 (4%) commission/Load
