Personal Investor: Discount brokers pocket advisor fees as review drags on

Canadian one dollar coins, also known as Loonies, and Canadian one hundred dollar banknotes are arranged for a photograph in Toronto, Ontario, Canada, on Wednesday, July 25, 2018. One of Prime Minister Justin Trudeau's envoys said the government would respond "proportionally" if the U.S. imposes tariffs on vehicles and parts, though Canada hasn't begun preparing any formal retaliatory package, two people familiar with the matter said. , Bloomberg

Dale Jackson

Personal Finance Columnist, Payback Time

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Canada’s discount brokers can continue to pocket advisor fees for advice they never give while a regulatory review of the controversial practice plods along. According to the Canadian Securities Administrators (CSA), the matter is being reviewed following three months of industry input – which started over six months ago last September – after initially being promised last June.

It’s not clear when the latest review will end but the CSA, a toothless association of Canada’s patchwork of provincial and territorial securities regulators, proposed a ban on trailer fees paid to discount brokerages last fall after seven years of consultation. Trailer fees are banned in most developed countries and investor advocates in Canada have been fighting for mutual fund fee reform for decades, arguing they create a conflict for unscrupulous advisors choosing compensation over the best interest of their clients. Ontario’s Progressive Conservative government has indicated it does not support a ban.

Meanwhile, many discount brokers continue to only offer the series of mutual funds that charge a trailer fee to pay for advice that isn’t even available to the investor. Trailer fees are hidden in a broader annual fee imposed by the mutual fund company to compensate the advisor who sells them. Since discount brokerages don’t provide advice, trailer fees coming from the mutual fund company are rarely returned to the investor.

A typical trailer fee is one per cent of the total amount invested in the fund. That one per cent is deducted each year whether the fund makes or loses money. It not only brings down annual returns, but it leaves the investor with less money in the fund to grow over time.

Mutual funds that impose a trailer fee are often listed as “A Series” funds. The same funds are often available as “D Series” without the trailing commissions. In many cases, mutual fund companies offer both, but discount brokerages only provide the higher fee versions.