A group of do-it-yourself investors has filed a lawsuit against Canada’s discount brokerage firms, alleging the brokers improperly received millions of dollars in fees from mutual fund investors for advice they never provided.
Koskie Minsky LLP filed the class-action lawsuit this week naming 11 major discount brokerage firms, including the online trading divisions of Canada’s six biggest banks as well as smaller discount brokers such as Questrade, Qtrade, Laurentian Bank’s and HSBC’s.
The suit alleges the brokerage firms improperly collected trailing commissions on mutual funds held in client accounts.
Trailing commissions are typically used to compensate an individual or firm for advice and services that has been provided to an investor. Do-it-yourself investors using discount brokerages usually do not work with advisers to purchase investment products. They typically conduct independent research, make their own investment decisions and should be steered into lower-cost mutual funds when building an investment portfolio.
The practice of paying trailing fees to discount brokers has been controversial for years, and regulators are in the process of banning the practice. The Canadian Securities Administrators, an umbrella group for all provincial securities commissions, announced last year it will effectively ban trailing commissions collected by DIY investing services.
Now those investors who have been paying millions of dollars in commissions for years are asking to be reimbursed.
Mutual funds that charge advice fees – known as Series A funds – account for 68 per cent of the total value of mutual funds assets in Canada, according to the Investment Funds Institute of Canada. They typically charge a management expense ratio (MER) between 1.5 per cent and 2.5 per cent. By comparison, Series D funds – those tailored for do-it-yourself investors that strip out advice fees – can have an MER of less than 1 per cent.
Although discount brokerages are not allowed to provide advice to do-it-yourself investors, about 83 per cent of mutual funds sold through discount brokerages in Canada are series that include trailing commissions. Of the total $30-billion in assets held in mutual fund products in discount brokerages, more than $25-billion were in fund series that bundled an advice fee within the product, according to a paper released in 2017 by the CSA.
Already, there have been several class actions filed against the mutual fund arms for all six of the major banks, as well as Mackenzie Financial Corp. Those lawsuits did not point the finger at the discount brokerage firms, but rather at the investment fund managers that created the funds and paid out the fees to the discount brokerages.
Trailing commissions are paid to discount brokerages by companies that manage and operate mutual funds, and are paid out of the value of an investor’s investments.
“Improper investment commissions whittle away the retirement savings of ordinary Canadians," Kirk Baert, a partner at Koskie Minsky, said in a statement. "The practice of collecting trailing commissions for no reason must stop.”
The claim states that in almost all cases, the group of investors were not aware they were paying these fees to brokers.
“Discount brokers cannot and do not provide advice or services to investors," Mr. Baert adds. "It is alleged that these commissions are inappropriate and unlawful and that these funds should be returned to investors.”
The class action has been filed on behalf of all investors who purchased mutual funds through a Canadian discount brokerage. The lawsuit does not seek a specific amount of restitution, but requests “substantial punitive damages.”
“Most providers have engaged in behaviour that does more to fatten their bottom line than improve investor experience and returns,” says Salman Ahmed, a portfolio manager with Steadyhand Investment Funds Inc., a low-cost investment company who has been a long-time advocate for fee transparency for investors.
"This had been going on for far too long – almost a decade – before it finally hit the radar of the industry. Discount brokerages are the ones who decide which funds make it onto their platform. Whether it’s explicitly or implicitly, some discount brokers have excluded various investment firms who did not charge these types of fees to investors, while others made it very difficult for those fund companies who did not pay to play.”