Since Canadians increasingly turn to lower-cost alternatives for their investment dollars, they’re discovering a hurdle they did not know exists: Some of the most common low-cost mutual fund families are not available on do-it-yourself online platforms.
Funds offered by numerous companies which have Mawer Investment Management, Leith Wheeler Investment Counsel and Steadyhand Investment Funds Inc. are no longer available on some of the most commonly used platforms, such as those run by leading banks.
The reason boils down to how those funds, unlike most mutual funds, don’t pay trailing commissions or administration fees to financial advisers or dealers who sell their own funds. Therefore, some online brokers aren’t listing these funds because there’s little financial incentive for them to do so.
A trailing commission — also called a trailer fee — is a part of a fund’s management expense ratio that’s paid out to consultants for the duration of time an investor holds a finance. Based on the type of finance, these charges can range from 0.25 percent up to 1.5 percent. Both the investment company and its advisor who sold the fund share in these commissions.
Earlier this season, the Canadian Securities Administrators published a paper seeking industry comment on the subject of quitting embedded commissions. The study revealed that about 83 percent of mutual funds sold through discount brokerages in Canada include trailing commissions which are ordinarily charged by financial advisors, therefore charging customers millions of dollars in fees for information they’re not receiving. It is a matter labs are now being forced to reform.
Of the total $30-billion in assets held in mutual fund products in discount brokerages, more than $25-billion stay in fund series that package an advice fee within the item, according to the CSA newspaper.
The elimination of capital that don’t pay trailing prices from online platforms has been a long-term, slow trend, says Dan Hallett, vice-president and leader with HighView Financial Group.
“The discount broker attitude was, for quite a very long time, that they would happily offer funds that paid them nothing with the notion that individuals would purchase enough funds from people paying much higher trailing commissions. These no-loads were loss leaders,” Mr. Hallett says. “Now, there might be fewer people buying trailer-paying funds through discount brokerage accounts, and together with investors making greater use of ETFs — and the production of D series — it’s most likely cut to these trailing commissions paid to discount brokers,” he says.
Mutual funds have different classes which feature a selection of fee structures. Series A funds are usually sold through a financial advisor and take higher trailer fees. Series D funds, made for do-it-yourself investors who don’t look for financial information, typically feature lower prices.
The Royal Bank of Canada (RBC) is the leader behind the D series funding. While they feature lower prices, the D series funds still include an embedded 0.25 percent trailer fee. These fees go to the bank to help cover various administrative expenses and give an incentive for these lower-cost funds to be offered to do-it-yourself investors.
In 2012, RBC Direct Investing became one of the first discount brokerages to get rid of certain fund companies that didn’t offer such incentives. It complies with RBC’s decision at the time to get rid of any trading commissions to buy, sell or change orders for all funds offered on its own platform, no matter whether the orders were made online, over the telephone, or via a mobile device.
“There are costs to conduct a supply company,” Sagar Gill, manager of customer experience strategy for RBC Direct Investing, stated in an interview. He explained such expenses as engineering, study, employees and property.
“Since RBC Direct Investing doesn’t charge our customers a fee for trading mutual funds, we made a business decision to only offer funds that cover a trailer, to help cover our supply business expenses. We adhere to the principle for RBC funds.”
The decision resulted in present holders of particular low-cost funds at RBC being averted for buying any additional units.
Some no-trailer-fee fund families had previously been offered to online broker clients so long as the investor paid an up-front government purchase fee. However, it’s a choice no longer available.
“In the past, the online brokerage community has been quite open about offering the choice to customers to pay an administration fee to buy the fund,” says Karey Irwin, vice-president of investment capital for Leith Wheeler. “Clients used to select the price and then the brokerages stopped doing this. For customers, if they would like to hold multiple fund families, they would see value in a small administration fee to buy all in 1 account.”
While investors can purchase investment funds directly from the fund company itself, the minimum initial investment amounts required are much greater than those in a discount broker. To invest directly with Mawer, an investor requires $50,000, while Leith Wheeler requires a $25,000 minimum. Steadyhand permits investors to open a direct account with a $10,000 minimum.
For all three, the minimum amount for an online discount broker purchase is $5,000.
When Mawer initially launched its mutual fund products, it provided a trailer fee of approximately 0.25 percent. But that was removed in 2009, making their funds less attractive to record at online brokers.
“We definitely need to make our funds available to investors that choose to purchase through a discount broker,” says Gavin Mahabir, director of customer services at Mawer Direct Investing Ltd. “Our products are transparent with no hidden charges or expenses — what you see is what you get — and the fees are the same if an investor chooses to buy from a discount broker or Mawer directly.”
Other online brokerages like TD, CIBC and Questrade are after RBC’s lead on many fund offerings. While TD Direct Investing offers investors the choice to buy Mawer funds on the internet, they simply provide the first 10 funds launched by the business and don’t have plans to include any additional funds to the stage. (Mawer has since added three capital to their fund family.)
“There are a variety of factors that go into choosing the funds we provide and we do review our services and products on a regular basis to make sure we are offering our clients a wide selection of options to satisfy their investment needs,” stated a TD spokesperson in an email to The Globe and Mail. TD didn’t elaborate on what the variables were.
When Steadyhand’s funds first appeared on TD’s platform, investors were charged a transaction fee when they chose to redeem the fund. TD has since removed this $45 fee for all funds which cover no trailer.
“It is clear for discount brokers to charge a commission (if reasonable), as they make no money by providing our funds. This is why it might be more cumbersome to buy our funds through certain suppliers,” Steadyhand composed in a blogpost once the funds were removed in 2013.
BMO InvestorLine, Scotia iTRADE, National Bank Direct Brokerage and CIBC Investor’s Edge Provides all funds provided by Mawer, Steadyhand and Leith Wheeler, although CIBC only offers Steadyhand and Leith Wheeler funds by telephone.
Questrade clients have the ability to buy all three finance companies on its internet platform but charge a $9.95 per transaction commission.
Some speculate that with tracking commissions now coming under scrutiny with both regulators and industry groups, discount brokerages — especially RBC — might have to rethink their cost of running online trading of mutual funds.
“If embedded commissions are removed I anticipate that discount brokers will just charge their own fee — to replace the trailer directly or in the shape of a upfront load,” Mr. Hallett says. “I don’t believe the interest in capital is so small that discount agents could survive without offering them. So in the absence of trailers that I think they’ll simply add their own pace. And I would bet that they know what that will look like given the chance of such a ban.”