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About $195 million is going to discount brokers, instead of you and me

MoneySense logo MoneySense 2018-04-15 John De Goey

a close up of a mans face: iStock© Used with permission of / © Rogers Media Inc. 2018. iStock

Did you notice how virtually everyone on Bay Street was up in arms when Bill Morneau announced recently that the federal deficit for the forthcoming fiscal year would be $18 billion?  The outcry was predictable and enormous:

  • How is this fair to future generations?
  • When will we ever return to surplus?
  • Notwithstanding the answers to the above, how long will it take to eradicate the accumulated national debt?

Well, I noticed something else…. rank silence on the matter of trailing commissions that are being paid by retail clients at discount brokerages. Specifically, the Canadian Securities Administrators (CSA) now tell us there is about $25 billion in A series mutual funds paying trailer commissions (ostensibly for financial advice) to discount brokers – a group that goes out of its way to inform its clients that it will not, under any circumstances, offer financial advice.

Here’s a pop quiz: assuming an average weighted trailing commission of 0.78%, how much money is being squandered annually?

The Answer: about $195 million.

READ: Do I still pay fund fees in a self-directed account?

In other words, every year, Canadians pay more than 1/10 of the annual deficit to discount brokers for non-existent financial advice.  Meanwhile, the financial services industry says that our federal government “squanders” far too much in its “spendthrift” fiscal plan.   To put this in perspective, let me ask:  how much would regulators save ordinary investors per day, if it disallowed this usurious practice? The Answer: ($25,000,000,000 x .0078)/ 365… or $534,246 per day.

READ: How mutual fund fees work

My question to the broader financial services industry is simple: why the silence on this?  If you genuinely want people to believe that you are speaking on behalf of the collective welfare of all Canadian citizens, then why do you say nothing when people are being forced to pay for advice that they neither request nor receive?

John De Goey is a Portfolio Manager with Industrial Alliance Securities Inc. and the author of The Professional Financial Advisor IV.  Industrial Alliance Inc.is a member of the Canadian Investor Protection Fund (CIPF).  The opinions expressed herein are those of Mr. De Goey alone and may not be aligned with the opinions and values of Industrial Alliance Securities Inc. or any of its affiliated companies.

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