Here’s an idea for some intrepid entrepreneur: beat the consumer-ignoring Canadian regulatory system at its own game. When Melanie Aitken and her people at the Competition Bureau are through with real estate agents and their monopolized access to MLS, they could do something similar regarding mutual funds.
The way things are structured now, most discount brokers force investors to buy A Class mutual funds (the ones with embedded trailing commissions) when using their services. Many advisors defend trailing commissions (Please, don’t refer to them as ‘fees’.) because they need to be compensated for their advice. What if the party providing access does so while expressly noting that it is not providing advice?
Even where F Class fund options exist, investors at discount brokerages are precluded from using them. That’s because the “f” is for “fee” and discount brokerages don’t charge fees. Accepting embedded commissions for advice that is neither requested nor received while holding out as not even offering advice is perfectly fine, however. And having fund companies run ads that say “Invest With Advice” while selling their products in an A Class format at discount brokerages (again, the people who expressly don’t offer advice) is perfectly fine, too. The shining exception here is Quest Trade, which at least has the decency to rebate the trailing commissions back to their clients, thereby demonstrating there’s a way around this problem for intrepid, fair-minded firms.
There may be other ways, too. For instance, any discount brokerage that really wants to capture a larger market share can likely do so by simply charging an “access fee” or some such thing. For the low, low price of (say) $20 a month, you could buy (i.e. have access to) F Class mutual funds at that discount brokerage. Unlike investment counseling fees, the flat access fee would not be deductible under section 20 (1) (bb) of the Income Tax Act, because it involves no associated advice regarding the buying and selling of securities.
The current system for mutual funds purchased at discount brokerages is like going to Canadian Tire, buying a muffler and then being charged for both the muffler and the installation even if you’re going to replace the muffler yourself in your own driveway.
The change would be a consumer-centric response to the current perverse form of negative-option billing. Here’s a quick call to action for all you STANDUP advisors out there. Why not write to the Competition Bureau and ask them to allow (Nay, force) discount brokerages to charge “access fees” while allowing consumers to buy F Class mutual funds? The status quo implies that advice is worthless. If the price of the product is the same with and without advice, then what’s the implicit value of that advice?
Advice has real value. To manipulate the playing field so that the price of a product without advice is artificially high in order to get people to grudgingly use advice is just wrong. I believe most people should work with an advisor but I do not believe the system should be rigged against them if they elected not to. Imagine being charged a ‘tax preparation service fee’ whether you used an accountant of filed your return yourself. We’re supposed to be professionals. What kind of true professional could sit idly by and condone such business conduct?