Tuesday, July 10, 2018

What the heck are "Service fees" ?

More fee issues in mutual fund land

The financial services industry has been plagued not only with high fees but with numerous scandals regarding overcharging, double billing, not applying breakpoints and charging for advice and not providing it.

There is also an important issue with trailers in “D” series funds used by DIY investors. The issue of discount brokers being compensated for "services" that they may or may not have provided to investors is one that deserves serious regulatory attention. 

There are no mutual fund disclosure documents ( Fund Facts, Simplified Prospectus) that define what is meant by "services" in the phrase "services and advice" that is the material phrase in the definition of a trailing commissions.  There does not appear to be a common definition applied to services by different mutual fund stakeholders. 

Our general impression is that the term “services” was left intentionally undefined by mutual fund companies so that different dealers can be left to interpret this term as they see fit and to their advantage under differing circumstances. However, the agreement to invest in a mutual fund is one between the mutual fund company and the investor - the definition of services rests with those parties (not the dealer) and most likely with the party that did not draft the mutual fund agreements (the investor). In our view, these D series trailer commissions are actually a redundant charge for services already provided in the Agreement the investor has with the discount broker.

As big a travesty as payments for advice that was not provided is the travesty of hundreds of millions of dollars of Canadian's wealth being transferred to dealers (discount and full service) each and every year for "services" that have never been defined. 

How can a retail investor know if he/she received a service that has no definition?  How can a dealer claim to have provided an investor with services when there is no definition for services?  Can a discount broker charge for a service  through your mutual fund holdings already included under the terms of your Account Agreement with your dealer (e.g. access to quotes, research reports, custody and safekeeping, webcasts, free educational seminars , online tools, real time market data and tax documentation .)? 

And why on earth would such a fee be based on the value of assets ? A small one time transaction fee is appropriate as it is for closed-end funds, ETF's including actively-managed ETF's . 

According to a paper released in January, 2017, by the Canadian Securities Administrators (CSA) that discussed the topic of discontinuing embedded commissions. there are a total of $30 billion held in mutual funds at discount brokers. And $1.5 trillion in other accounts. At a 0.25% rate estimate for services  this translates into about $3.75 billion per annum for “ services”.

Regulators should be examining this charge.

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