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Controversial commissions: DIY investors fight back against trailer fees

A Toronto man says his "head exploded" when he learned he'd lost more than $60,000 from his retirement nest egg by paying fees for financial advice he never got — and that his broker isn't legally allowed to provide.

"Investors are getting screwed," said Steve Pozgaj.

Pozgaj, 65, is one of a growing number of Canadians who are do-it-yourself investors, using online brokerages to purchase mutual funds and other investments, instead of through a financial adviser.

Last year, he and his wife were dinged almost $5,000 in trailer fees — also known as trailing commissions — which are embedded commissions paid by mutual fund companies to compensate advisers and firms that sell their funds, for the services and advice they provide clients.

Pozgaj estimates he's been indirectly paying those fees to his discount brokerage, TD Direct Investing, for more than a decade, which means he's also lost the effect of compounded interest.

In the case of do-it-yourself investment sites, like the ones Pozgaj uses, securities regulators strictly prohibit online brokers from giving advice.

"Why should I be paying for advice when they're legally not able to give it?" said Pozgaj.

In the dark

Pozgaj said he had no idea he was paying for the supposed advice until a few months ago, when he took a close look at his investment statements, after the industry was forced to be more transparent about the fees charged to investors.

"I have no problem paying somebody to manage my mutual funds; that's what they do to make me money, and I'm generally happy with TD," said Pozgaj. "But paying for advice that I'm not getting? Crazy."

In an email to his discount broker at TD Direct Investing last April, Pozgaj asked about the trailer fees. His broker responded: "Everything is as it should be."

We're talking well into the tens of millions of dollars that have been paid for advice that was never delivered. - Lawyer Michael Robb

Pozgaj considers himself a knowledgeable investor; in the 1990s, he was a chief information officer at Mackenzie Financial, a large investment management firm.

Yet he had never heard of a type of mutual fund he could have been purchasing, called "Series D" funds. They're designed specifically for DIY investors, with lower fees — and no trailing commissions.

"I'm not Einstein," said Pozgaj. "But if I didn't know about them, with my level of sophistication, I would bet dollars to doughnuts that not many people know about this at all."

Class-actions filed

Five months ago, Siskinds LLP, a law firm based in London, Ont., filed a proposed class-action lawsuit against TD Bank's investment management firm, TD Asset Management, claiming there were "breaches of trust" when TD charged trailing commissions for advice that was not provided by a discount brokerage.

"As discount brokers do not and cannot provide investment advice to investors, the paying of trailing commissions … is improper, unreasonable and unjustified," Siskinds wrote in its statement of claim.

Siskinds also filed a similar proposed class-action in June against Scotiabank's investment management divisions regarding trailing commissions paid to discount brokers.

Doug Husby/CBC
Doug Husby/CBC

"Investors are now seeing the dollars and cents they're paying by way of management fees, which include trailing commissions on these [DIY] mutual funds — and I think people find it troubling," said Siskinds lawyer Michael Robb.

He admits he himself once had DIY investments and paid trailer fees.

"I'm sure there are thousands of people, if not more, who are affected by this," said Robb. "We're talking well into the tens of millions of dollars that Canadians have paid for advice that was never delivered."

The proposed class-action suits have yet to be certified and no response has been submitted by either bank.

When contacted by Go Public, both TD and Scotiabank said they are unable to comment on the proposed class-actions as the matter is "currently before the courts." TD added that its mutual fund fees are all disclosed on its website.

'Industry-wide' problem

Although the proposed class-action lawsuits target two investment fund management companies, Siskinds is currently considering class-actions against other mutual fund management companies, Robb said, because charging DIY investors for advice they're not getting is "an industry-wide" issue.

A 2017 report by the Canadian Securities Administrators (CSA), an umbrella group for all provincial securities commissions, estimates that there were more than $25 billion worth of mutual fund products paying trailer fees held in discount brokerages, as of the end of 2015.

"It's a big problem and it's costing regular people a lot of money," said Robb. "It's money taken out of their accounts every year and it compounds."

Proposed ban

Last Thursday, the CSA published its proposal to ban trailer fees paid to discount brokerages. It is giving the industry three months to comment on the proposed change.

The move comes years after the CSA launched in 2012 a review of the fees on mutual funds, which are the country's most commonly held investment product.

Gary Morton/CBC
Gary Morton/CBC

The delay is disappointing to some investment experts, including Larry Bates.

"This has been going on for years," said Bates, a former investment banker turned independent investor advocate, and author of a how-to book for Canadian investors titled Beat the Bank.

"I would like to see the regulators act more decisively and more quickly on this issue."

'Biggest secret on Bay Street'

While Bates said he believes paying trailer fees to discount brokers is "ridiculous," he said those products are really just a small segment of the total mutual fund market, which totals $1.49 trillion, according to the Investment Funds Institute of Canada.

"The impact of mutual fund fees on retirement accounts, over time, is the biggest secret on Bay Street," said Bates. "Investors are unaware, and the industry wants to keep it that way."

A typical mutual fund's total fees range from 1.5 per cent to 2.5 per cent a year, Bates said.

"Those fees are deducted from retirement accounts," he said. "But the industry never presents a bill. Investors are never showed the quantum of fees they pay, and they don't see the impact of those fees over time."

Over a 25-year time frame, Bates said a two per cent fee will strip out about 50 per cent of an investor's total returns. "It's plain wrong, and really takes advantage of investors."

Investors would be well-served learning some investment basics, Bates said. The fees aren't just an issue for individuals, he argues, but "a social issue" as well.

"Who's going to pay for the retirements of our generation and the next generation? The business model we have in the investment industry that's addicted to these high-cost products serves Canadian investors extremely poorly," he said.

"It's not good for Canadians. It's as simple as that."

As for Pozgaj, he says he's been waiting to see how TD will address his concerns about the trailer fees he's been indirectly paying, and is considering legal action.

"I just can't see injustice being done and do nothing about it," he said. "This just seems wrong. It's morally incorrect, what they're doing."

With files from Enza Uda

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