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Controversial Commissions: Do-it-yourself investors struggle against trailer fees



A Toronto man says his "head exploded" when he learned he had lost more than $ 60,000 from his retirement nest by paying taxes for financial advice he never received and that his broker is not authorized by law to provide.

"Investors are fucking themselves," said Steve Pozgaj.

Pozgaj, 65, is one of a growing number of Canadians who are do-it-yourself investors, who use online brokerage services to buy mutual funds and other investments, rather than through a financial advisor.

Last year, he and his wife were sold for $ 5,000 in trailer commissions – also known as final commissions – which are embedded commissions paid by mutual fund companies to compensate for consultants and companies that sell their funds , for the services and advice they provide to customers.

Pozgaj estimates that it has indirectly paid these commissions to its brokerage of discounts, TD Direct Investing, for over a decade, which means it has also lost the effect of compound interest.

In the case of do-it-yourself investment sites, such as those used by Pozgaj, securities regulators strictly prohibit online brokers from providing advice.

"Why should I pay for advice when I am not legally able to give it?" called Pozgaj.

Nell & # 39; darkness

Pozgaj said he had no idea to pay the supposed advice until a few months ago, when he gave a look at his investment statements, after the industry was forced to be more transparent about the fees charged to investors.

"I have no problem paying someone to manage my mutual funds, it's what they do to make money, and I'm generally happy with TD," said Pozgaj. "But for advice I'm not receiving? Crazy."

In an e-mail to his discount agent at TD Direct Investing last April, Pozgaj asked for trailer fees. His broker replied: "Everything is as it should be".

We are talking about the tens of millions of dollars that have been paid for advice that has never been delivered.– Attorney Michael Robb

Pozgaj considers itself an expert investor; in the 1990s he was Chief Information Officer at Mackenzie Financial, a large investment management company.

Yet he had never heard of a type of mutual fund that he could buy, called "Serie D" funds. They are designed specifically for do-it-yourself investors, with lower commissions and no final commission.

"I'm not Einstein," said Pozgaj. "But if I did not know them, with my level of sophistication, I would bet dollars in donuts that not everyone knows at all."

Classified actions

Five months ago, Siskinds LLP, a London-based law firm, Ont, filed a collective action proposal against TD Bank's investment management company, TD Asset Management, claiming that there were "breaches of trust" when TD final commission fees for advice this was not provided by a discount brokerage.

"Because discount agents do not provide and can not provide advice to investors, the payment of final commissions is improper, unreasonable and unjustified," wrote Siskinds in his statement.

Siskinds also presented a similar class action proposed in June against Scotiabank's investment management divisions on the final commissions paid to discount agents.

Attorney Michael Robb estimates that Canadians have paid "tens of millions of dollars" for financial advice they have never received. (Gary Morton / CBC)

"Investors now see the dollars and cents they are paying by way of management fees, which include final commissions on these [DIY] mutual funds – and I think people find it worrying, "said Siskinds attorney, Michael Robb.

He admits he once had do-it-yourself investments and paid trailer fees.

"I'm sure there are thousands of people, if not more, who are affected," said Robb. "We're talking well about the tens of millions of dollars that Canadians have paid for a council that has never been delivered."

The proposed class action suits have yet to be certified and no response has been submitted by either bank.

When contacted by Go Public, both TD and Scotiabank said they were unable to comment on proposed class actions as the issue is "currently before the courts". TD added that its commissions on mutual funds are all disclosed on its website.

Problem "at the sector level"

Although the proposed class action lawsuits are addressed to two investment fund management companies, Siskinds is currently evaluating shares classified against other mutual fund management companies, Robb said, because charging DIY investors with advice they do not get is a "sector-wide" issue.

A report by the Canadian Securities Administrators (CSA) of 2017, an umbrella group for all provincial securities commissions, estimates that there were more than $ 25 billion of mutual fund products that paid for roaming charges held in discount transactions, starting from the end of 2015.

"It's a big deal and it costs a lot of money a lot of normal people," said Robb. "Every year money is taken from their accounts and accumulates."

Prohibition proposed

Last Thursday, the CSA published its proposal to prohibit roaming charges paid to discount intermediaries. He is giving the industry three months to comment on the proposed change.

The move comes years after the CSA launched in 2012 a review of commissions on mutual funds, which are the most commonly held investment products in the country.

Investor defender and author Larry Bates says that mutual fund commissions can generally consume the total return of the investor. (Evan Mitsui / CBC)

The delay is disappointing for some investment experts, including Larry Bates.

"This has been going on for years" said Bates, a former investment banker who became a lawyer for independent investors and authored a how-to book for Canadian investors entitled Beat the bank.

"I would like to see the regulators act more decisively and faster on this problem."

"The biggest secret of Bay Street"

While Bates said he believes paying trailer fees to discount brokers is "ridiculous," he said these products are actually just a small segment of the total mutual fund market, which amounts to $ 1.49 trillion, according to the Investment Funds Institute of Canada.

"The impact of mutual fund commissions on pension accounts over time is Bay Street's biggest secret," said Bates. "Investors are not aware and the industry wants to keep it that way."

The total commissions of a typical mutual fund range from 1.5 to 2.5% the year, Bates said.

"These taxes are deducted from pension accounts," he said. "But the industry never presents an account: the investors have never shown the amount of commissions that pay and do not see the impact of these taxes over time".

Over a period of 25 years, Bates said that a two percent commission will eliminate about 50 percent of an investor's total returns. "It's absolutely wrong and really exploits investors".

Investors would be well served by learning some basic notions about investments, Bates said. Taxes are not just a problem for people, he claims, but also "a social issue".

"Who will pay the retirement of our generation and the next generation? The business model we have in the investment sector that is dependent on these high-cost products will serve Canadian investors extremely badly," he said.

"It's not good for Canadians, it's that simple."

As for Pozgaj, he says he has waited to see how TD will address its concerns about the trailer fees it is paying indirectly and is considering a legal action.

"I can not see the injustice being done and doing nothing about it," he said. "This just seems wrong, it's morally incorrect, what they're doing."

With Enza Uda file

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