The majority of mutual funds sold through online brokerages are charging clients millions of dollars in fees for advice they are not receiving, an issue regulators are being pressured to reform.
About 83 per cent of mutual funds sold through discount brokerages in Canada include trailing commissions that are typically charged by financial advisers for the advice they provide. Of the total $30-billion in assets held in mutual fund products in discount brokerages, more than $25-billion remain in fund series that bundle an advice fee within the product, according to a paper released in January by the Canadian Securities Administrators.
These funds are commonly known as Series A mutual funds and account for 68 per cent of the total amount of funds sold in Canada, according to the Investment Funds Institute of Canada (IFIC). These funds can charge a management expense ratio between 1.5 per cent to 2.5 per cent. By comparison, Series D funds – those tailored for do-it-yourself investors that strip out advice fees – it can be less than 1 per cent.
Do-it-yourself investors usually do not work with advisers to purchase investment products. As a result, these investors conduct independent research, make their own investment decisions and receive lower cost pricing when building an investment portfolio.
"Since discount brokers cannot and do not provide investment advice, clients are being robbed of returns," says Ken Kivenko, an investor advocate. "The investor abuse is staggering. Collecting money for advice while not providing it doesn't seem to bother [the regulators]."
Mr. Kivenko says there have been repeated efforts by industry groups to get the regulators to sanction discount brokers, but so far they have been ignored.
Earlier this month, IFIC proposed regulators adopt a rule that would ensure mutual funds that carry an embedded adviser fee are only sold in channels where advice is offered.
"Most companies already provide other series of funds with no or nominal trailer fees that investors can purchase if they are do-it-yourself investors or want to pay for advice separately," IFIC says in a statement. "The industry's proposal would advance the goal of ensuring that low-trailer or no-trailer funds are available to these types of investors in a more uniform and transparent way."
The regulators include all provincial securities commissions and the Investment Industry Regulatory Organization of Canada (IIROC) – which oversee investment firms including those in the discount brokerage channel.
"We think with IFIC joining in, IIROC may finally be forced to act," Mr. Kivenko says. "Seniors' nest eggs have been overcharged by these outrageous fees – fees for no service and fees that have been charged for many years."
IIROC recently issued findings on a review it completed on compensation-related conflicts of interest, and while it did not specifically look at the discount brokerage channel independently, the regulator said it will take IFIC's comments into consideration.
There are more than a dozen discount brokerages in Canada, including those run by all the major banks.
When contacted by The Globe and Mail, the majority of these discount platforms confirmed Series A mutual funds were available for purchase by DIY investors. Both HSBC InvestDirect and Desjardins online brokerage platform Disnat do not offer Series A funds for purchase. (Laurentian Bank Discount Brokerage and Credential Direct did not return calls for comment.)
Among those offering the funds, several platforms said they were aware of the discrepancies in fees being paid and either have measures in place, or are working on establishing measures, to make clients aware of additional options for purchase.
RBC Direct Investing will only sell a Series A mutual fund if a DIY version is not available. If a clients search for a Series A fund, they will only see an option to sell. About 50 per cent of all its mutual-fund assets under administration is held under their Series D offerings.
While TD offers DIY investors funds with embedded fees, it also offers its online clients low-cost index funds – known as the e-series – with MERs that can be as low as 0.33 per cent.
Questrade Financial has set up a reimbursement program to pay back all trailer fees directly to clients when they purchase a commission-based product (although there is an administration fee deducted to do so).
Qtrade's platform does not have a reimbursement program, but has pro-actively contacted clients to educate them more on the fund series. In February, Qtrade e-mailed all investors stating: "One way to avoid trailer fees is to hold D-series funds, which are a lower-cost option offered by some mutual-fund managers. Many Series D funds are already available on our website."
Virtual Brokers, a division of BBS Securities Inc., offers Series A funds, but they have minimal assets as the platform has seen a significant shift to exchange-traded funds, says Bardya Ziaian, CEO of BBS Securities Inc.
But many industry groups are asking regulators why the funds are allowed to be offered on these platforms in the first place.
FAIR Canada – an investor advocacy group – has long argued that discount brokerages should not be permitted to offer Series A mutual funds since they are not permitted to provide recommendations or advice, says Marian Passmore, director of policy and chief operating officer of FAIR Canada.
FAIR Canada has asked regulators to consider a requirement for discount brokers or fund companies to offer a class of funds that have no trailing commissions. In addition, the recommendation would also see all firms that offer a particular mutual fund be required to offer the "F" class version of the fund, which does not have a trailing commission.
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