Despite the meteoric rise in do-it-yourself and passive investing, most Canadians continue to save for retirement through mutual funds. They remain the only investment vehicle to offer professional management and diversification to those with modest portfolios.
Fees on Canadian mutual funds are among the highest on the industrialized world partly because a hidden advisor fee, also known as a trailing commission, is baked into the price. It’s hidden so well that many discount brokers collect the fee for advice they never provide, even when a less expensive non-advisor version could be available.
Trailing commissions are collected by mutual fund companies through a broader annual fee called the management expense ratio (MER). Fund holders pay the MER based on the amount they have invested in the fund whether it makes money or not. MERs vary from company to company and according to asset class, but a typical fee on an equity fund is 2.5 per cent. Inside that fee a typical trailing commission is one per cent.
While one per cent might seem like a small amount, it could add up to tens of thousands of dollars as a portfolio grows over time. That’s tens of thousands of dollars not invested and not compounding over time.
Trailing commissions are banned in countries including the United Kingdom and Australia even for mutual funds sold through an advisor. After years of heel-dragging, the practice of discount brokers collecting trailing commissions was recently banned by Canadian securities regulators, but the ban does not come into effect until June 2022. Even then, nothing compels discount brokers to offer non-advisor versions of mutual funds.
The best way to tell if your discount broker is pocketing your trailing commission is by simply looking at the letter that follows the name of the mutual fund in your account. As a general rule, funds that have a trailing commission will have an A (advisor) at the end, and the version that does not charge a trailing commission will have a D (discount). If the mutual fund name is followed by an A, you are paying for advice you never get.
The first step is to find if your discount broker even offers a D version of your fund. In some cases, they do but they conveniently (for them) failed to provide you with the lower-cost version. If your discount broker does not offer a D version, go the mutual fund company website and see if they offer a discount series.
Not all fund companies follow the same lettering code but the proof is in the difference in MERs. If different versions of the same fund show MERs with a difference of about one per cent, it really doesn’t matter what they call it. You want the less expensive version.
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Mutual fund fees are suspiciously ambiguous to the point where discount brokers have assumed advisor fees as part of their compensation structure. In a statement on its ban on trailing commissions for discount brokers, the toothless patchwork of provincial and territorial securities regulators known as the Canadian Securities Administrators (CSA) says the June 2022 deadline was needed to give them time to “transition their systems and processes” and “reassess their internal compensation arrangements and implement new fee charging systems.”
Similar consideration was given to mutual fund companies to provide “sufficient time to make available a no-trailing commission mutual fund series” for discount brokers, such as the D series many already have.
That’s a lot of time considering discount brokers and mutual fund companies have already had a decade to think it over. Discount brokers are among the largest customers for mutual fund companies. When they put their heads together, it’s safe to assume the fee burden will somehow find its way to retail investors.
Payback Time is a weekly column by personal finance columnist Dale Jackson about how to prepare your finances for retirement. Have a question you want answered? Email firstname.lastname@example.org.