Personal Investor: Discount brokers are pocketing advisor fees
If you invest in mutual funds through a discount brokerage, there’s a chance you are paying hundreds of dollar each year in hidden fees for advice you never get.
To understand, you need to follow the money. Mutual fund companies collect annual fees from investors based on a percentage of the amount invested in their funds. That fee is called the management expense ratio, or MER, and it’s typically 2.5 per cent for a basic equity fund. In dollar terms, that’s $2,500 on every $100,000 invested each year.
Whether you purchase the fund through an advisor or a discount brokerage, a portion of the MER - called a trailer fee - is returned to the fund dealer to compensate the advisor.
Here’s the Investopedia definition: “The trailer fee pays the salesperson for providing the investor with ongoing investment advice and services”.
The trailer fee is typically one per cent of the amount invested. In dollar terms, that $1,000 on every $100,000 invested each year.
While discount brokerages don’t provide any investment advice, they still pocket the trailer fee. The one exception is Questrade, which returns the fee to some investors.
But it gets worse. Under the terms of new advisor fee disclosure rules, known as CRM2, advisors must disclose the trailer fee to clients in dollar amounts as well as a percentage.
Discount brokers do not have to disclose how much they are collecting in trailer fees because they are admittedly not advisors – and are permitted to keep the dollar amount hidden.