Do-it-yourself investors will soon have to pay fees for mutual fund trades on certain discount brokerages, as companies prepare to recoup losses from regulatory changes that will no longer allow online trading platforms to sell mutual funds with embedded charges known as trailing commissions.
Starting March 7, Canadian Imperial Bank of Commerce will begin charging an upfront fee of $6.95 a trade when clients buy or sell mutual funds on its online brokerage, CIBC Investor’s Edge.
RBC Direct Investing – the online brokerage of Royal Bank of Canada – notified clients that, as of March 14, mutual fund purchases will be subject to a fee of 1 per cent of the gross trade amount, up to a maximum of $50. There will be no charge for selling mutual funds on the platform.
Historically, the majority of trading platforms in Canada have waived trading costs for mutual funds in favour of collecting trailing commissions from fund companies. The same platforms typically charge around $10 a trade for stocks or bonds.
Trailing commissions are payments a mutual fund company gives annually to an investment dealer for selling its investment products. They are supposed to compensate financial advisers for providing continuing advice to investors, and are embedded in a fund’s management expense ratio. But discount brokers are prohibited from providing advice to investors under regulatory rules, meaning they have collected billions in commissions without providing the intended service.
In Sept., 2020, after years of industry consultation, the Canadian Securities Administrators, an umbrella group for all provincial and territorial securities commissions, announced that it was banning discount brokers from selling funds that include such fees. The CSA gave discount brokerages until June 1, 2022, to prepare for the rule change.
CIBC spokesperson Trish Tervit confirmed to The Globe and Mail that, as of March 7, CIBC Investor’s Edge will only sell mutual funds that do not have embedded trailing commissions.
The bank’s new $6.95 fee for mutual funds, Ms. Tervit added, is “consistent with the cost of trading other investment products on our platform.”
RBC spokesperson Kathy Bevan said in an e-mail that as part of the bank’s move to align with the CSA’s coming changes, it will also stop selling any mutual funds that pay trailing commissions as of March 7.
Canada’s largest online discount brokerage, TD Direct Investing, has decided to continue not to charge any trading fees for buying or selling mutual funds on its online platform even after June 1, the bank said in a statement.
Bank of Nova Scotia declined to comment on whether there would be any charges associated with mutual fund trades on its discount brokerage, Scotia iTrade. National Bank of Canada spokesperson Stéphanie Rousseau said in an e-mail that the bank is “currently working to ensure that it complies with the upcoming regulations so that it can continue to offer mutual funds on its platform, National Bank Direct Brokerage.”
“Further details will be available in the coming months,” Ms. Rousseau added. The bank does not currently charge fees for buying or selling mutual funds.
Bank of Montreal spokesperson Jeff Roman said in an e-mail that the bank is still evaluating whether there will be any changes to BMO InvestorLine’s fee structure for mutual fund investing. Currently, BMO does not charge do-it-yourself investors for purchasing or selling mutual funds.
“As of December 1, 2021 the vast majority of mutual fund purchases bought on InvestorLine were into mutual funds with no trailing commissions,” Mr. Roman said.
Independent brokerage Questrade Inc. currently charges $9.95 per mutual fund trade, and is one of the only online brokerages that refunds trailing commissions to clients. The company began rebating trailing commissions for mutual funds in 2009, but it subtracts an administrative charge of $29.95 a month for doing so.
Questrade said in a statement that mutual funds make up less than 2 per cent of the company’s client assets and that the rebate program will continue until June, when the CSA rules come into effect and customers will no longer be able to buy funds with trailing commissions.
Several class-action lawsuits have been filed against discount brokerages. One of the claims estimates that investors have incorrectly paid about $5-billion in trailing commissions on mutual funds since the early 1990s.
The “pay to play” culture has resulted in many low-cost independent funds that do not pay trailers – such as those managed by Mawer Investment Management, Leith Wheeler Investment Counsel and Steadyhand Investments Inc. – not being listed on some of the largest trading platforms in the country. It is not yet known if trading platforms will add these independent mutual funds after June 1.
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