Dale Jackson

Personal Finance Columnist, Payback Time

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Do-it-yourself mutual fund investors aren’t waiting for securities regulators to ban fees for advice they never get.

A proposed class action lawsuit has been filed against the Bank of Nova Scotia affiliated 1832 Asset Management and Dynamic Mutual Funds, questioning the common practice of discount brokerages charging trailer fees. A similar suit has been filed against TD Asset Management.

Trailer fees, or trailing commissions, are embedded fees collected by mutual fund companies each year to compensate the advisor who originally sold the fund. They are collected through an annual management expense ratio (MER), based on the total amount invested. As an example, a typical MER on a mutual fund is 2.5 per cent or $2,500 for every $100,000 invested. A portion of the MER, typically one per cent or $1,000 on every $100,000 invested, is sent back to the advisor as a trailing commission.                 

Discount brokers don’t provide advice, yet in most cases investors pay thousands of dollars each year – often without even knowing.

Canadian securities regulators, under the leadership of the Ontario Securities Commission (OSC) recently vowed to prohibit discount brokers from charging trailer fees but it is merely a non-binding proposal at this point. 

Trailer fees are charged on what are termed “Series A” mutual funds, which implies they are sold through an advisor and account for most mutual funds sold in Canada. Some of the same funds come in other series that charge smaller or no trailer fees and are intended to be sold through discount brokerages.

Some mutual fund companies only offer A Series funds, and most brokerages choose to only offer them.