What the Ontario government is trying to do to the investment industry is shameful. We like to think regulations are there to protect us, but the current Ontario government and the Canadian Securities Administrator are doing anything but that. The last few months have been incredibly frustrating to watch as regulatory proposals come out that are clearly not in investor’s best interests.
As always, I want to know what you think! Please leave me your thoughts in the comments below.
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In my last video, I spoke about how the Canadian Securities Administrator, or the CSA, had dropped the ball on the proposals it released in June of this year.
The CSA proposals were:
- to ban deferred sales charges on mutual funds,
- to stop the payment of trailer fees to discount brokerages and
- to enhance disclosure of conflicts of interest between advisors and their clients.
As I mentioned in my last video, these are positive steps in the right direction, but they fall far short of what other countries, like the UK and Australia, are doing to protect investors.
But since I released that video, the Ontario Government has come out to oppose even these weak CSA proposals, in what is a pretty obvious attempt to protect the industry at the expense of investors.
There is no defending Deferred Sales Charges. Deferred Sales Charges or DSC, allow advisors to grab a larger up-front commission when they sell a fund, which supposedly incents advisors to work with smaller clients. Or at least this is how the industry defends the use of DSCs.
The reality is that DSCs hurt investors
They charge a penalty if the investor sells their DSC fund in the five to seven years after buying it. Also, the quality of the advice suffers from so many well-documented biases, like the propensity to sell higher commission and higher risk funds.
The good news is that the rise of low-cost alternatives has made the world of DSC funds and trailing commissions antiquated and obsolete. Clients with smaller portfolios would be far better off using low-cost, index funds offered by Vanguard, Tangerine and other fund providers.
What’s also mind boggling is that the Ontario government would oppose banning trailer fees paid to discount brokerages. If you remember from my last video, trailer fees are paid by fund companies to advisors, ostensibly to compensate them for the advice they are providing to clients.
I think there are few conflicts as clear cut as the payment of trailer fees to discount brokerages. Discount brokerages do not offer any advice to clients. They make it clear when you open an account that they are not advising on your choice of stocks or funds. You’re on your own! They say this to avoid litigation when clients lose substantial sums buying stocks and funds they have no business buying. But, they’re all too happy to collect trailer fees when their clients buy mutual funds.
As you might have seen in the news, Siskinds LLP and Bates Barristers PC have already engaged class action lawsuits against CIBC, Scotia and TD for collecting trailer fees in their discount brokerages, without delivering the service that the fees are intended to pay for. It’s a wonder that these lawsuits weren’t undertaken sooner. But I can understand that going up against the big banks that hire the largest, most expensive law firms in the country, can be an understandably daunting prospect.
But just because it’s a daunting prospect, doesn’t mean it should be ignored. This is exactly where regulators are supposed to step in. Regulators are supposed to defend those who are too small, or who don’t have deep enough pockets, to defend themselves against the giants taking advantage of the situation. This story plays out far too often in the personal finance industry and investors have had enough!
Here’s what you can do to protect yourself:
- If you work with an advisor, ask him or her to confirm that none of your funds have deferred sales charges.
- If you’re investing through a discount brokerage, make sure you are using only D-class mutual funds, to ensure that the brokerage isn’t receiving a trailer fee.
What do you think of these new regulations? Tell me about it in the comments!