Explain to me why Canadian authorities are letting brokerage firms discount service fees to their customers WITHOUT offering them any services? This is the Canadian scandal in mutual funds. In case you do not know, for a mutual fund that charges, say 1.5%, one-third of the fee is reserved for the advisor / planner who oversees the client’s account. This “trailing commission” gives the financial resources to the professional to meet, listen, analyze, propose solutions and harmonize the elements of his portfolio in a sound financial plan.
Brokerage firms have been doing business
In recent years, discount brokerage firms have been doing business in gold. They largely belong to our big banks. These firms are intended to “take control” of the autonomous investors. They put all their marketing efforts into low transaction fees and commissions. It would be easy to talk about collusion so their conditions are similar. For example, they NEVER compete in the highest paying category of their inventory. Like the oil companies, they impose their dictates without allowing discussion or negotiation.
Fees for the same fund
In the mutual fund industry, there are always 2 levels of fees for the same fund. Series A or B funds are part of the “series board”, as the name says, they are intended for the consumer who receives the support of a counselor. As for Series I or F funds, they are intended for the self-employed investor or the person who is billed for fees by his financial professional. Like ETFs, Series F and I funds have significantly reduced fees (from 33% to 75% less). These are the latter that must be compared to the US market, since it operates mainly with the fee model. Well, the same way, the discount brokerage firms refuse ALL to allow their autonomous customers to choose the series without consulting or at reduced costs. They take advantage of the fund companies’ advertising campaigns and systematically encourage them to buy because they pocket the generous “service fees” without offering any advice or support. How is it possible? Why is it allowed? The answer must be in the word “lobby”.
You may have read a few shares that securities regulators would want to reform the principle of mutual fund commission payments in Canada. According to several observers, quietly, but surely we would move towards a model of wealth management 100% fee as in Australia and England.
Oh yes, to be transparent costs, they are, but they are now more expensive. The number of councilors having decreased by 25%, the remaining councilors had only to increase their rates so as not to be overwhelmed by work. We have created an effect of rarity in a field already struggling with a glaring lack of manpower.
The main challenge for Canadian authorities in transforming mutual fund commissioning lies in the definition of “service fees” and transparency. As described above, most of the trailing commissions for investment funds are included in the Management Series’ management expense ratio. They are used to compensate advisors and planners who assist, advise and physically meet clients. So why make a fuss when we could only prohibit distribution by the cabinets that do not promulgate a minimum of advice?
Funds disguised as a basket camouflage their expenses
There is another serious problem that in my view is neglected by the authorities.
The management expense ratio is not taxed uniformly throughout the industry. Some banking or securities products are riding the nuances and avoid calling themselves mutual funds or UCITS (Collective Investment Schemes Organization). Whether they are called Stock GICs, linked notes, stock baskets, common funds or private mandates … etc., they charge fees directly into the investor’s pocket, but neglect to present the total and full amount of their costs. We are going to believe that some of these funds (because that’s what it is) do not have a management fee. Bullshit. Or they are put into a non-discounted account as if it were a publicly traded security.
This opacity of pseudofunds is never questioned, but it is still the investor who pays. I have noticed that some of these products have total fees that are higher than many mutual funds. The same we like to decry. Customers are voluntarily referred to their own products for the simple reason that the benefits to employees and the brokerage firm are greater.