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A substantial number of do-it-yourself investors are paying for financial advice they are not getting and never will.

That's what can happen when you buy mutual funds from an online broker. While you typically pay nothing to buy and sell your funds, the cost of owning them can be identical to what is paid by investors who have advisers.

There's almost a conspiracy of silence on this matter in the investment industry and it results from the fact that the status quo serves brokers and fund companies quite well.

Mutual funds and online brokers don't seem like an obvious combination, yet funds account for 14 per cent of the $228-billion invested through online brokerage firms, the latest retail brokerage report from Investor Economics shows. Stocks, of course, are the top choice at 66 per cent. Cash and cash equivalents such as Treasury bills account for 12 per cent of assets and bonds and guaranteed investment certificates account for 8 per cent.

Wondering where exchange-traded funds fit in? ETFs are an excellent option for DIY investors because they're so cheap to own and manage, but they account for just 4.3 per cent of online broker assets (Investor Economics lumps them in with stocks).

For the time being, mutual funds are a much bigger business for online brokers than ETFs. Funds are also more lucrative, which may explain why so few firms have done anything to cut the cost of investing in funds for clients.

Four years ago, RBC Direct Investing became one of only a tiny minority of online brokerages to offer cut-rate funds to its do-it-yourself clientele. The firm introduced a D-series of RBC-brand mutual funds with fees that were cut substantially. The response from other online brokers? Actually, there was none.

"I would have thought after we launched D-series that the rest of the industry would have followed, and we haven't seen that," said Jason Storsley, CEO at RBC Direct Investing. "We thought we were setting a new trend."

Besides RBC Direct Investing, the brokers that offer any type of a discount for do-it-yourself investors who own funds are Qtrade Investor and Questrade. Qtrade's initiative is new and small in scope, but it bears watching because it makes a very small number of F-class mutual funds available to clients.

Many popular mutual funds have a low-cost F-class version that is designed to be used by fee-based investment advisers. F-class funds strip out trailing commissions, a component of fund fees that mutual fund companies channel to advisers and their firms to pay for ongoing client service. Fee-based advisers charge clients directly for advice, so they don't need the trailing commission.

DIY investors are obvious customers for F-class funds as well because they get no investment advice and thus should not pay a trailing commission. Yet Qtrade seems to be the only online broker to offer F-class funds, and even there the selection is limited to a small and motley group of 38 funds.

"It's modest for sure," said Scott Gibner, Qtrade's CEO. "This is a bit of a toe-dipping for us. We're trying to get a feel for what type of appetite there is for this."

Most of Qtrade's F-class offerings are in the OceanRock and Meritas fund families, which are part of the Qtrade corporate family. But there are also a few funds from industry kingpins like CI, Dynamic, Fidelity, Mackenzie and Templeton. The F-class fund selection covers all the major portfolio building blocks, including Canadian, U.S. and international markets (I will publish the full list of Qtrade's F-class offerings on my Facebook personal finance page on Monday.

Mr. Gibner said the drawback for online brokers in offering F-class funds is that they forgo money made through trailing commissions. A solution here would be to charge clients a fee, maybe $25, to buy and sell F-class funds. Savvy investors would understand that the $25 fee is chump change in comparison to the money wasted in buying mutual funds that pay trailing commissions to their online broker. Note: The largest Canadian equity funds have management expense ratios in the area of 2 per cent on average, and a full percentage point of that is accounted for by the trailer.

Fund companies themselves are an impediment to DIY investors getting full access to F-class funds. The background here is that investment advisers do most of the selling of mutual funds in this country. Fund companies worry advisers will be alienated if their clients have to pay more for funds than DIY investors.

The idea of clients fleeing their advisers to buy F-class funds through online brokers is ludicrous. Did the full-service brokerage business shrivel up when online brokers began offering cut-rate stock trades? No way.

Still, it's not clear whether the fund industry would allow open access to F-class funds through online brokers. Qtrade's offering is a test case that I'll be watching closely.

Questrade's deal for fund investors is the Mutual Fund Maximizer program, where you pay $29.95 per month and in exchange get all trailing commissions rebated back to you every three months. You need to have at least $36,000 invested in equity funds to make the Maximizer program worthwhile.

Another option for DIY investors who want to keep fees low is to look at a small group of fund companies that offer funds to the public with little or no trailing commissions built in. Beutel Goodman, Jarislowsky Fraser, Leith Wheeler, Mawer, McLean Budden, Phillips, Hager & North and Steadyhand are among the companies that qualify.

Two things to be aware of if you investigate funds like these: The minimum upfront investments can be as high as $5,000 to $10,000, and you need to be careful to buy the right fund series. With PH&N, for example, it's the D series that has the trailing commission left out and is thus a good option for the DIY fund buyer.

If you happen to deal with RBC Direct Investing, its D-series funds from the RBC fund family are also worth a look if you have a minimum $10,000 per fund to invest.

"We encourage our clients to buy the D series because it offers them a discount on the MER, and they're not paying for advice from us that they are not receiving," RBC's Mr. Storsley said.


Here are four ways to save money on funds purchased on your own through an online broker. In each case the funds presented do not have trailing commissions embedded in their fees. Trailing commissions are paid out of fund fees by fund companies to advisers and to investment firms that sell fund products.

1. RBC Direct Investing

Buy D-Series funds from the RBC fund family.

Example: RBC Canadian Dividend Series D

(min. purchase: $10,000)

MER: 1.18%

(MER for standard version of this fund: 1.77%)

Three-year return: 9%

(Three-year return for standard version of this fund: 8.4%)

2. At Qtrade Investor

Buy F-class mutual funds.

Example: Templeton Global Bond F-class

(min. purchase: $1,000)

MER: 1.63%

(MER for standard version of this fund: 2.16%)

Three-year return: 7.03%

(Three-year return for standard version of this fund: 6.47%)

3. At any online broker

Buy low-cost mutual funds that include zero or minimal commissions for investment firms in their fees.

Example: Mawer Canadian Equity (min purchase: $5,000)

MER: 1.22% (MER for average Canadian equity fund: 2.59%)

Three-year return: 10.38% (Three-year return for the average Canadian equity fund:8.20%)

4. At Questrade

Get your trailing commissions rebated back to you.

The Mutual Fund Maximizer program offers quarterly trailer rebates to clients at a cost of $29.95 per month. A portfolio with at least $36,000 in equity funds is needed to make the program worthwhile.


Check out our 2011 online broker rankings below:

Qtrade keeps its lock on No. 1 in Globe's annual survey

Best brokers for specific need

How online brokerage commissions stack up s

Where online brokers excel, and where they let us down

Results from The Globe's 2011 online brokerage satisfaction survey