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Personal Finance Sorry investors, but this time I’m not defending you when it comes to online brokerage practices

If you can’t research a simple mutual fund, you’re not cut out to be a do-it-yourself investor.

So enough with the outrage over online brokerage firms selling mutual funds with embedded fees for investment advice. In what may be a first, I’m not jumping to the defence of investors on this one.

Online brokers are strictly prohibited by securities regulators from providing advice, so selling these funds to unsuspecting clients is unethical. But DIY investing is no place for unsuspecting people. You should view every stock and investment product as being a trap until proven otherwise.

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Mutual funds happen to be the easiest product ever to research. Fund companies are required to offer simplified prospectuses, Fund Facts documents and semi-annual reports on fund performance. Together, these documents provide lots of information to help people make informed choices.

The brokerage industry regulator, the Investment Industry Regulatory Organization of Canada (IIROC), said in a notice issued this week that firms selling funds with built-in advice fees raise a conflict of interest for online brokers because of the ban they’re subject to on providing advice.

The IIROC notice says brokers are expected to address this conflict by offering Series D funds, which are designed specifically for DIY investors and have lower fees. If an investor buys one of the many funds that aren’t available in a Series D version, the broker is supposed to rebate fund fees associated with advice or take similar steps.

Investor advocates have been asking regulators to stop brokers from collecting advice fees on the funds they sell for years. They had a valid point, regulators have acted and now we can move forward in the knowledge that investors who don’t bother to research even the most elementary products are protected.

Except for one small complication. A pair of law firms have proposed a class action lawsuit against TD Asset Management over advice fees it pays to online brokers selling its mutual funds. TD, as with most fund companies, pays the sellers of its funds a fee to cover service and advice, online brokers included. The lawsuit targets TD as trustee of the funds, rather than the brokers selling these products. But the underlying allegation is that investors are being abused when they hold non-D-series funds in an online brokerage account and thus pay for advice they won’t actually receive.

As a DIY investor using an online broker, you have the flexibility to buy virtually all types of securities – stocks, bonds, options, guaranteed investment certificates, exchange traded funds and mutual funds. About 7 per cent of online brokerage holdings are in mutual funds, according to the winter 2018 retail brokerage and distribution report from Strategic Insight. Just less than two-third of assets were in stocks, 15 per cent was in cash, 9 per cent was in exchange-traded funds and 5 per cent was in bonds and guaranteed investment certificates.

The small share for mutual funds makes sense. While there are some great mutual funds (I invest in some myself), many overcharge and underperform. Funds such as these are what drive people to online brokers so they can buy low-cost ETFs or individual stocks and bonds.

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But let’s say you did want to buy a mutual fund for your online brokerage account. The fund’s Fund Facts document, available online and written in the plainest possible English, will show you both the overall fee of the fund and the component that goes to cover the cost of advice (called the trailing commission).

Fund Facts documents say something to the effect that trailing commissions are for the services and advice your representative and your representative’s firm provide to you. Don’t people set up online brokerage accounts because they want to avoid paying for advice? If so, why buy a fund that comes with a clear disclosure that you’re paying for advice?

Plain-language explanations of how investments work are glaringly unavailable in much of the investing world. Most prospectuses are written in a defiantly ambiguous legalese that is designed not to inform, but to deflect blame in case something goes wrong.

Mutual funds, as the investment of the masses, are required by regulators to have the clearest, most understandable standard of disclosure. So let’s use mutual funds as a basic test of financial literacy for DIY investors. If you bought the wrong fund and paid fees for advice you didn’t receive, that’s on you.

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