Here’s my latest tip to keep you on track. Are you paying for something you didn’t order? It happens all the time. Especially with your bank.
We’ve all experienced this.
You go to a restaurant for dinner. The bill comes. You notice you were charged for an appetizer you didn’t order. You point it out to the server. The server says, “I’m so sorry… I’ll fix it right away.”
No big deal. Everyone makes mistakes. Right?
Now imagine your server says, “That’s right. You didn’t order that appetizer. But we’re adding it to your bill anyway, because the restaurant wants to make more money.”
Are you kidding me? Who can get away with that!
Your bank can.
When it comes to investment fees, the banks (and a few other players) are collecting millions of dollars doing exactly that. And they’re still doing it today.
Are you overpaying on your investment fees? Keep reading to find out.
Brokers Behaving Badly
A class action lawsuit was recently filed against 12 major discount brokerage firms. The lawsuit includes all six major Canadian banks, as well as a few smaller discount brokers.
So you need to pay attention. Especially if you’re a brokerage client at RBC, TD, Scotiabank, BMO, CIBC, National Bank, Laurentian Bank, Desjardins Securities, HSBC, BBS Securities, Qtrade, or Questrade.
Yes, even Questrade is included in the lawsuit. You might know Questrade from their punchy television ads claiming you can save fees and “retire up to 30% wealthier.” It turns out they’re overcharging their clients, too. (So much for the “saving fees” thing.)
Here’s what’s going on: The brokers are collecting millions of dollars in commission fees from certain mutual funds investors. These commission fees are supposed to be compensation for providing advice to investors. The problem is all these clients are do-it-yourself (DIY) investors.
These DIY investors are not getting any advice at all. But some of them are being charged for it. Even worse, most of these investors don’t even know it’s going on.
To understand what’s happening, think of a bathroom renovation: Some people are handy. To this group, a bathroom reno means going to the Home Depot, buying the fixtures and supplies you need, then spending a few days gutting and rebuilding your bathroom.
Other people are not so handy. Or they don’t have the time, or desire, to do the work. To this group, a bathroom reno means hiring a trusted professional to do the job.
Both choices are smart ways to get a new bathroom. You just have to pick the one that works for you. The DIY group saves money by doing the work themselves. The hire a professional group pays for expertise and labour.
Here’s a question: Does the Home Depot charge you for labour that you supply? Of course not! That makes no sense. But in the investment world, logic doesn’t always apply.
By law, discount brokers are not allowed to provide advice to their clients. But that doesn’t stop them from collecting fees for advice they don’t provide. In Canada, about 83 percent of the mutual funds sold through discount brokers pay trailing commissions. By one estimate, discount brokerages have $25 billion in investment funds that pay them commissions for doing nothing.
And these fees matter. Mutual funds that include advice fees – known as Series A funds – typically charge a management expense ratio (MER) between 1.5 percent and 2.5 percent. By comparison, Series D funds – those built for do-it-yourselfer investors – strip out the advice fee. Series D funds have an MER of less than 1 percent.
To put that in perspective, say you have an RRSP worth $50,000. If that money is invested in a Series A mutual fund at a discount broker, you’re overpaying $500 in fees each year. And that mistake compounds each year you hold the fund.
Paying for something you didn’t get is crazy, right? And I’m not talking about an $8 appetizer that was accidentally added to your bill (and quickly corrected). I’m talking hundreds, maybe thousands of dollars in over-charges on unsuspecting investors.
You might be wondering: Where’s the regulator? Aren’t they supposed to stop things like this? Great questions.
The Canadian Securities Administrators (CSA) is the umbrella group for all provincial securities commissions. The CSA announced in 2019 that it plans to ban all trailing commission fees collected by DIY investing services.
But regulators move very slow, and the ban is still not in place. At the start of 2020, brokers continue to collect fees for services they don’t provide. So you need to take matters into your own hands.
Learning about the problem is the first step. The next step is to take action. But how?
Don’t worry, I’m here for you. (I told you I was going to keep your finances on track this year!) Here are my tips to make sure you’re not overpaying on your investment fees:
1) Make sure you’re in the right class
No I’m not talking about school. (Although I do remember sitting in the wrong classroom a few times in university). I’m talking about your investment class.
Most investment funds have different classes. Think airline tickets: first class, business class, economy etc. Each investment class has a different management fee.
As I mentioned above, Class D funds were built for DIY investors. So if you manage your own money at a discount broker, make sure to choose Class D funds when you can.
However, not all mutual funds have Class D versions. For example, a popular fund might only have a Class A version. In cases like this, you might be better off substituting the popular fund with a Class D competitor. Just do your homework before making the switch.
2) Use an independent advisor who can shop around
It’s not just DIY investors who are being overcharged fees. Other investors are paying too much, too.
Most bank representatives can only sell their proprietary products, so they can’t shop around for clients if their fees are high. Some robo advisors charge low advisory fees, but that fee only covers a small set of services that may be cheaper elsewhere.
If you work with a financial advisor, make sure they’re an independent advisor who is also a fiduciary. Independent advisors have access to a wide range of investment solutions for clients.
If your advisor is also a fiduciary, they are required to put your interests first. That means they won’t stuff your bill with imaginary appetizers.
Keeping You on Track
Make this year the best it can be! Watch for more tips coming soon.
Got a question? Send me a message. (Yeah, it’s that easy!)
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Paul Carvalho, MA, CFA. Financial Advisor, Provident Wealth Financial. Investment Fund Advisor, Investia Financial Services Inc. Mutual funds and/or approved exempt market products are offered through Investia Financial Services Inc. (“Investia”). Mutual funds and exempt market products are sold exclusively by Representatives who are licensed by provincial regulators and registered with Investia. Commissions, trailing commissions, management fees and other expenses may be associated with mutual fund/exempt market product investments. Please read the Fund Fact or prospectus carefully before investing. Mutual fund and exempt market product investments are not guaranteed, their values change frequently, and their past performance may not be repeated.