Investment-fund managers may be held responsible for do-it-yourself investors being charged millions of dollars in fees for advice they are not receiving, according to a recent lawsuit filed against TD Asset Management Inc.
Earlier this month, two Ontario-based law firms, Siskinds LLP and Bates Barristers P.C., filed a proposed class-action lawsuit against TDAM regarding trailing commissions paid to discount brokers on certain TD mutual funds.
Last year, regulators were called in to take a closer look at Series A mutual funds that were being sold through discount brokerages. Series A, also known as adviser series funds or A-class funds, are typically sold through a financial adviser and include trailing commissions for the advice an adviser provides.
Series A funds account for 68 per cent of the total amount of mutual funds assets in Canada, according to the Investment Funds Institute of Canada, and can charge a management expense ratio (MER) 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 – can have an MER of less than 1 per cent.
But despite discount brokerages not being allowed to provide advice to do-it-yourself investors, about 83 per cent of mutual funds sold through discount brokerages in Canada include trailing commissions. 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 2017 by the Canadian Securities Administrators.
Last year, industry groups asked regulators to address the problem of discount brokers selling these funds, with some groups asking regulators to no longer allow the funds to be sold through these channels.
Earlier this month, the Investment Industry Regulatory Organization of Canada (IIROC) issued guidance to online brokers (also referred to as order execution only – or OEO firms) stating that funds that include advice fees pose a conflict of interest for OEO platforms since they are not permitted to offer advice.
IIROC, the industry regulator that oversees discount brokers, also stated in its guidance that platforms should address this conflict by offering funds that do not pay a commission for ongoing advice – such as Series D funds. If there is no Series D version available for the funds, IIROC recommends the online brokerage resolve the conflict by, for example, reimbursing the portion of the trailing commission that is related to advice.
But now, in a proposed class-action lawsuit, plaintiff Gary Stenzler isn’t pointing the finger at the discount brokerage as the one responsible for overcharging him in investment fees, but rather the investment-fund manager that created the funds and pays those fees to the discount brokerage.
A class action filed on April 13 alleges that TDAM, as the trustee and manager of TD mutual funds, pays substantial sums of money out of TD mutual funds as trailing commissions to discount brokers through which the mutual funds are sold, an action that doesn’t sit right with Mr. Stenzler.
“I invested in mutual funds to save for retirement and to help fund my children’s education,” Mr. Stenzler said in an statement. “I was troubled to learn that the trustee of the mutual funds I owned was taking a portion of my life’s savings to pay my discount broker for advice and services which I did not receive.”
TD declined to comment on the allegations, stating that “as a policy we do not comment on matters that are before the courts.”
TDAM describes the purpose of the trailing commissions as compensation for “services and advice” provided to investors. However, discount brokers are prohibited from providing investment advice to investors, and so it is alleged that investors who hold these funds in discount brokerages receive no value for the trailing commissions paid.
“TDAM is a trustee and a trustee owes particular obligations to the beneficiaries of a trust,” said Michael Robb, a lawyer with Siskinds LLP in London, Ont. “One of those obligations is to use the assets of the trust only for the benefit of the beneficiary and in this case it is alleged that there is no benefit being obtained, so why is TDAM paying these fees?”
The action claims damages of $200-million and other relief on behalf of investors who hold or held such funds at a discount brokerage. The suit has yet to be certified by the court as a class action.