It’s time Canadians got the investment industry they deserve

How would you feel if you were charged thousands of dollars for advice you never received?

Well, that is exactly what’s been happening to clients of discount brokers who bought mutual funds carrying commissions normally paid to financial advisors. The clients paid, but they didn’t get any advice—discount brokers aren’t allowed to provide investment advice.

Commissions for ongoing advice, known as trailing commissions, are typically 1% on an equity mutual fund, or about $1,000 a year for every $100,000 invested. Investor advocate Ken Kivenko estimates discount brokerage clients have been overcharged about $190 million a year.

Last month, the investment industry self-regulator, IIROC, finally did something to stop the practice, after years of complaints from industry observers. IIROC issued a notice stating that advice fees in mutual funds raise a conflict of interest for discount brokers.

It said brokers are expected to address this conflict by offering Series D funds that do not pay a commission for ongoing advice. If an investor buys a fund that isn’t available in a Series D version, the broker is supposed to rebate the advice commissions.

Around the same time in April, a pair of law firms in Ontario filed a proposed class-action lawsuit against TD Asset Management over trailing commissions paid to discount brokers on TD Mutual Funds.

No shortage of problems

There’s been no shortage of other news over the last year about overcharging and questionable sales practices in the investment industry.

There was a rash of settlements between Ontario Securities Commission and big financial institutions over excess fees charged to clients and unpaid interest on mutual funds and other investments, stretching back years. The settlements resulted in over $350 million in compensation being paid to clients.

Most recently, two mutual fund managers agreed in settlements with the OSC to pay fines over lavish promotional activities and gifts to financial advisors, including tickets to professional sporting events and concerts by big stars.

Mackenzie Financial Corp. agreed to pay a $900,000 administrative penalty plus $150,000 in investigation costs, while Scotiabank’s asset management division, 1832 Asset Management, agreed to pay a $800,000 administrative penalty and $150,000 in investigation costs. A year earlier, Sentry Investments was ordered to pay a $1.5 million administrative penalty and $150,000 in investigative costs over similar practices.

How to improve the industry

Canadian investors deserve an investment industry that is free from conflicts of interest and hidden or excessive fees and commissions.

Aggressive enforcement has to be coupled with stricter investor protection, starting with a ban on trailing commissions. We also need to hold advisors to a fiduciary standard that requires them to act in their clients’ best interest.

The industry’s troubles of the last year prove these reforms are long past due.