End discount brokers' overcharging now, urges investor advocate

Kenmar Associates says 2022 ban on trailing commissions shouldn't act as license for long-standing 'malpractice' among OEO firms

End discount brokers' overcharging now, urges investor advocate

In September, the Canadian Securities Administrators (CSA) finally brought the hammer down on the use of trailer-fee funds at order-execution-only (OEO) firms.

“The CSA, along with the Investment Industry Regulatory Organization of Canada and the Mutual Fund Dealers Association of Canada (the SROs), remind registrants of their obligations to treat investors fairly and recommend suitable products,” the CSA said as it announced final rules to prohibit such funds among discount brokers.

Those rules will not come into effect until June 1, 2022, giving OEO firms time to navigate the onerous process of transitioning their systems, processes, and fee charging models, while fund providers will be able to make sure OEO investors in trailing-commission funds will have a non-trailer version to migrate to.

But according to one investor advocate, the CSA should not have needed to declare that ban in the first place.

“Trailing commissions are paid to dealers by mutual fund companies for advice and services to be provided to unitholder clients,” Kenmar Associates said in a new commentary. “The problem is that the fund companies make these payments to discount brokers who do not and cannot provide personalized advice or specialized unitholder services.”

The “scandalous mess” of discount brokerages overcharging through trailing commissions has been reported for years, the commentary noted, with the first exposes coming over a decade ago. Multiple class actions have also been filed against Canada’s largest institutions over the issue.

And while firms might see the 2022 deadline as a reprieve, Kenmar noted that by all rights, they should be required as early as now to discharge their obligations to remove DIY investors from trailer funds. Existing rules and laws surrounding conflicts of interest, disclosure, and KYP, as well as Provincial Securities Acts are already applicable to trailers, it said.

“There really is no need to ban a malpractice that existing rules and laws adequately deal with IF they are enforced,” the commentary said. “If the promised benefits of fund ownership are not provided, then the price of the fund is improper and unfair- clients are being overcharged to the benefit of the discount brokerage. Securities regulators are not mandated to condone such behaviour.”

Established IIROC conflict-of-interest rules, the commentary added, already dictate that discount firms must resolve such conflicts in the best interests of clients, which means cases of DIY investors placed in trailer funds should be dealt with forthwith.

“A long transition period does not give discounters the right to blatantly charge for promised advice they cannot and do not provide and services that are available to all discount broker clients regardless of whether they hold a mutual fund,” Kenmar said. “A future ban of an unfair and improper practice does not provide a shield for discounters to abuse clients today.”


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