CRM2 to expose discount fee secrets

New mutual fund disclosure rules will shed light on discount broker trailer fees – and investors may be surprised

The fact that discount brokers receive the same commissions on funds as their full-service counterparts has long been a point of contention within the industry. However, a silver lining may be presented in the form of CRM2 regulations, going into effect today, as investors will begin to realize what they’re paying for.

As clients receive their first cost and commission disclosures, they may realize they’re paying similar fees for far less service says Dan Hallett, vice president and principal at HighView Financial Group.

“I think it will eventually come through the CRM2 disclosure because there’s a distinction there between full service and discount. They’re an investment dealer, and if they’re receiving commissions they have to issue the report,” he says.

While much of do-it-yourself investment has shifted to exchange-traded funds, Hallett adds there’s still a “great deal of money” in mutual funds, meaning those dealers will find their cost structures exposed this year.

“You’d think do-it-yourselfers are a little more conscientious in fleshing out the details before they invest in things, and that’s not always the case, so I think there’s potential for that lightbulb moment to happen over the next year,” he says.

Investors likely aren’t aware that their discount brokers collect the same trailing fees on investments as a full-service adviser as no disclosure has been available beyond Fund Facts, Hallett adds – and it’s those who haven’t had transparent practices that will be most challenged by the new disclosure requirements. He points to two surveys released by Justwealth and Tangerine this week that conclude people are unaware of the costs they’re paying.

“Two things are going to happen; the performance reviews are going to shed light on what performance really is and I think most people will be disappointed with the numbers that show up on those reports. And coinciding with that, they’re going to get cost and commission disclosure and they going to look at the two and say, ‘I thought my performance was a lot better, and I’m paying all these fees,’ – that’s why the industry is having some angst with this stuff on the horizon.”

“But there are those advisors - and there are lots of them - who have been pretty transparent about cost and compensation over the years, and CRM2 will play to their favour,” he says. “But to everybody else, I think it’s going to be a real challenge.”

Related stories:
Two thirds of investors don’t know how much they pay in fees
Alternate advisors – prepare to be grilled on fees