CRM2 seen to expose fee-pocketing among discount brokers

Clients of discount brokers may be in for a big shock as CRM2 comes into effect, according to a BNN report

CRM2 seen to expose fee-pocketing among discount brokers

While advisors everywhere have been concerned about the reaction investors may have to CRM2-mandated fee disclosures, especially with regards to trailer fees, errant discount brokers may have an even bigger cause for concern.

In a recent BNN video report, finance expert Dale Jackson explained that discount brokers, which many investors perceive as a value-for-money service, may be collecting advisor fees on mutual funds for advice they never give.

“At the core of this is the trailer fee,” Jackson stated. He establishes that trailer fees should only be charged for ongoing advisory services before explaining further: “I went to Glenn Lacoste at Surviscor–now, Surviscor monitors and ranks the online brokerages–and he says ‘yep, they do charge a trailer fee. All but one: except for Questrade.’ ”

The problem, the report explains, is that when one deals with a discount broker, there is no advisor giving advice. Therefore, when the trailer fee passes from the mutual fund company to the discount broker, the discount broker pockets it. Most investors who buy mutual funds via a discount broker are probably not aware of the trailer fee as it is hidden in the fund’s management expense ratio.

“This is the way the big discount brokerages and the big banks [compensate their employees]. They skim the money, they take the money to pay their employees and it’s baked into their model,” Jackson said.

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