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DIY investors, please check your snobbery about mutual funds for just one minute.

Following a push from regulators a year ago, online brokers are getting better at providing access to funds with lower fees than those sold by investment advisers. The prototypical DIY investor fled mutual funds to buy stocks and exchange-traded funds. But mutual funds offer the sort of diversification and professional management that might appeal to cautious DIYers.

Buying mutual funds at an online broker remains a tricky business, though. If you’re not careful, you can still buy funds with fees that are inflated by compensation to investment dealers for advice and service to clients. There’s a panoply of fee wastage here – the whole point of DIY investing is to avoid advice costs, and online brokers can’t even offer advice because securities regulators prevent them from doing so.

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Let’s quickly review the most common mutual-fund series: Series A and B may be sold by advisers or bank branches, low-fee Series D is for DIY investors using an online broker and Series F is for use by advisers who offer fee-based accounts. That’s where clients pay a percentage of their account assets as an advice fee and product fees are layered on top of that to get the all-in cost (fees for all other mutual funds cover both the cost of owning the product and advice or service).

A review of fund-selling procedures at five major online brokers found that it’s now standard for clients ordering funds to be defaulted into the Series D version, when it’s available. Where a Series D version of a fund doesn’t exist, investors will typically end up buying a Series A version.

The key difference between Series A, B, D and F is the trailing commission, an industry term for payments from fund companies to advisers and dealers as compensation for advice and client service. The cost of trailers is built into fund fees – investors don’t pay them directly.

Expect one percentage point of a Series A mutual fund’s management expense ratio (MER) to be allotted to the seller – online broker or investment advisory firm – as a trailing commission. On bond funds, the trailing commission is usually 0.5 of a point. Balanced funds can be at 1 per cent, even though they can be half bonds.

A Series D equity or balanced fund would have a trailing commission of 0.25 per cent, while a bond fund might be 0.15 per cent. Those vestigial trailers are supposed to compensate online brokers for providing a platform to buy and sell mutual funds. Only Series F has no trailer at all.

The mutual-fund share of online brokerage assets has declined in the past five years, but it’s still substantial. The data analysis firm Strategic Insight reports that almost $35-billion in online brokerage assets were held in mutual funds as of March, 2019, or 7.4 per cent of the total.

ETFs accounted for $46.2-billion of online brokerage assets in March, which makes sense. They’re ideal for DIY investors because the best of them offer exceptionally low fees and transparency.

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Still, some DIY investors have opted for mutual funds and used them in their online brokerage accounts over the years. Unwittingly, they may have long owned Series A funds with full trailing commissions designed to compensate investment firms providing advice.

Securities regulators have long forbidden the online-brokerage business from providing advice. But it was only a year or so ago they proposed changes that would prohibit online brokers from selling mutual funds with trailing commissions embedded in their fees.

The brokerage industry has responded with measures to help ensure clients end up in Series D funds, including procedures to direct clients to Series D funds where possible when placing a fund order.

Brokers are also trying in one way or another to notify clients who hold Series A funds about the availability of cheaper Series D versions. For example, BMO InvestorLine says it communicated the availability of Series D by e-mail, on the web and through phone campaigns. Qtrade Investor says it has included a note about this in its client e-newsletter multiple times since May, 2017.

TD Direct Investing sent letters late last year to clients holding mutual funds encouraging them to review their holdings and invest in Series D if available. RBC Direct Investing has used rotating banner-ad campaigns online to inform clients about Series D. These funds are also featured as a prominent choice on the main research centre menu. Scotia iTrade says it notifies clients about Series D in various ways that include client newsletters and educational resources.

Some of the brokers said they have similarly reached out to clients who have regularly added money to Series A funds through a systematic investing plan.

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Online brokers have clearly made an effort to get the attention of their clients holding Series A mutual funds. But it’s easy to see busy people missing these letters and online notices and thus not making the switch to Series D. This is why all investors who own mutual funds at an online broker should review their holdings immediately to see what exactly they own.

Tax-wise, there’s some good news for people switching to the Series D version of a fund held in Series A. The general consensus among brokers is that this transaction would not be a taxable event in a non-registered account if done correctly.

Thoughts from RBC Direct Investing on switching to Series D from Series A: “Switches from Series A to Series D do not have any tax implications as long as the fund had no load [a sales fee when you bought] and the units are deferred sales charge-free. In addition, to remain a non-taxable event, the buy and sell order to initiate the switch must be the same dollar amounts, have the same transaction date and the same account number.”

The new regulations covering sales of mutual funds by online brokers are still under consideration by the Canadian Securities Administrators, a group of provincial securities regulators. A CSA spokesperson said the group is currently reviewing comments from investing industry players on its proposed changes.

Meanwhile, DIY investors angry about the trailing commissions they have already paid are pursuing class-action lawsuits against several different fund companies. Essentially, they’re challenging the payments of trailers by these fund firms to online brokers.

Anthony O’Brien, a partner at the law firm Siskinds LLP, said a court will begin deciding in January, 2020, whether the most advanced of the lawsuits can proceed.

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While online brokers have focused on Series D funds as the answer to the regulatory move against them collecting trailing commissions, the ideal solution would be to sell trailer-free Series F funds. However, the fund industry insists on reserving Series F for fee-based advisers and keeping them out of the hands of online brokers. There are exceptions, though.

The independent broker Qtrade Investor says its clients can buy Series F versions of funds from NEI Investments and Vanguard, a big player in ETFs that also has a fund business. There are also a small number of mutual-fund brands that have no trailers in their fees and offer funds through online brokers. Examples include Mawer, Leith Wheeler and GBC.

One further thought for committed DIY mutual-fund investors is to take a look at Questrade, an online broker that charges its mutual fund-holding clients a $29.95 monthly fee and rebates trailing commissions back to them each quarter. This may be attractive for investors who have large accounts held in funds.

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