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As Canadians increasingly turn to lower-cost options for their investment dollars, they are discovering a hurdle they didn't know exists: Some of the most popular low-cost mutual fund families aren't available on do-it-yourself online platforms.

Funds offered by several companies that include Mawer Investment Management, Leith Wheeler Investment Counsel and Steadyhand Investment Funds Inc. are no longer available on some of the most widely used platforms, including those run by major banks.

The reason boils down to the fact that these funds, unlike most mutual funds, do not pay trailing commissions or administration fees to financial advisers or dealers who sell their funds. As such, some online brokers are not listing these funds because there is little financial incentive for them to do so.

A trailing commission – also known as a trailer fee – is a portion of a fund's management expense ratio that is paid out to advisers for the length of time an investor holds a fund. Depending on the type of fund, these fees can range from 0.25 per cent up to 1.5 per cent. Both the investment firm and its adviser who sold the fund share in these commissions.

Earlier this year, the Canadian Securities Administrators released a paper seeking industry comment on the topic of discontinuing embedded commissions. The research revealed that about 83 per cent of mutual funds sold through discount brokerages in Canada include trailing commissions that are typically charged by financial advisers, therefore charging clients millions of dollars in fees for advice they are not receiving. It's an issue regulators are now being pressured to reform.

Of the total $30-billion in assets held in mutual fund products in discount brokerages, more than $25-billion remain in fund series that bundle an advice fee within the product, according to the CSA paper.

The removal of funds that don't pay trailing fees from online platforms has been a long-term, gradual trend, says Dan Hallett, vice-president and principal with HighView Financial Group.

"The discount brokerage attitude was, for a long time, that they'd gladly offer funds that paid them nothing with the idea that people would buy enough funds from those paying much higher trailing commissions. So these no-loads were loss leaders," Mr. Hallett says. "Now, there could be fewer people buying trailer-paying funds through discount brokerage accounts, and along with investors making greater use of ETFs – and the creation of D series – it has most likely cut into those trailing commissions paid to discount brokers," he says.

Mutual funds have various classes that feature a range of fee structures. Series A funds are typically sold through a financial adviser and carry higher trailer fees. Series D funds, created for do-it-yourself investors who do not seek financial advice, typically feature lower fees.

The Royal Bank of Canada (RBC) is the pioneer behind the D series funds. While they feature lower fees, the D series funds still include an embedded 0.25 per cent trailer fee. These fees go to the bank to help cover various administrative costs and offer an incentive for these lower-cost funds to be sold to do-it-yourself investors.

In 2012, RBC Direct Investing became one of the first discount brokerages to remove certain fund companies that did not offer such incentives. It coincided with RBC's decision at the time to eliminate any trading commissions to buy, sell or switch orders for all funds sold on its platform, regardless of whether the orders were made online, over the phone, or through a mobile device.

"There are costs to run a distribution business," Sagar Gill, director of client experience strategy for RBC Direct Investing, said in an interview. He cited such expenses as technology, research, employees and real estate.

"Since RBC Direct Investing does not charge our clients a fee for trading mutual funds, we made a business decision to only offer funds that pay a trailer, to help cover our distribution business costs. We adhere to this principle even for RBC funds."

The decision resulted in even current holders of certain low-cost funds at RBC being prevented for purchasing any additional units.

Some no-trailer-fee fund families had previously been offered to online brokerage clients as long as the investor paid an up-front administration purchase fee. But it's an option no longer available.

"In the past, the online brokerage community was quite open about offering the option to clients to pay an administration fee to purchase the fund," says Karey Irwin, vice-president of investment funds for Leith Wheeler. "Clients used to take the cost and then the brokerages stopped doing that. For clients, if they want to hold multiple fund families, they would see value in a small administration fee to purchase all in one account."

While investors can buy investment funds directly from the fund company itself, the minimum initial investment amounts required are much higher than those at a discount brokerage. To invest directly with Mawer, an investor needs $50,000, while Leith Wheeler requires a $25,000 minimum. Steadyhand allows investors to open a direct account with a $10,000 minimum.

For all three, the minimum amount for an online discount brokerage purchase is $5,000.

When Mawer first launched its mutual fund products, it provided a trailer fee of approximately 0.25 per cent. But that was eliminated in 2009, making their funds less attractive to list at online brokers.

"We definitely want to make our funds available to investors who choose to purchase through a discount broker," says Gavin Mahabir, manager of client services at Mawer Direct Investing Ltd. "Our products are transparent with no hidden fees or expenses – what you see is what you get – and the fees are the same whether an investor chooses to purchase from a discount broker or Mawer directly."

Other online brokerages such as TD, CIBC and Questrade are following RBC's lead on several fund offerings. While TD Direct Investing offers investors the option to purchase Mawer funds online, they only offer the first 10 funds launched by the company and do not have plans to add any additional funds to the platform. (Mawer has since added three funds to their fund family.)

"There are a number of factors that go into selecting the funds we provide and we do review our products and services on a regular basis to ensure we are offering our customers a diverse range of options to meet their investing needs," said a TD spokesperson in an e-mail to The Globe and Mail. TD did not elaborate on what the factors were.

When Steadyhand's funds first appeared on TD's platform, investors were charged a transaction fee when they decided to redeem the fund. TD has since eliminated this $45 fee for all funds that pay no trailer.

"It's understandable for discount brokers to charge a fee (if reasonable), as they make no money by offering our funds. This is also why it may be more cumbersome to purchase our funds through certain providers," Steadyhand wrote in a blogpost when the funds were first removed in 2013.

BMO InvestorLine, Scotia iTRADE, National Bank Direct Brokerage and CIBC Investor's Edge offers all funds offered by Mawer, Steadyhand and Leith Wheeler, although CIBC only offers Steadyhand and Leith Wheeler funds by phone.

Questrade clients are able to purchase all three fund companies on its online platform but charge a $9.95 per trade fee.

Some speculate that with trailing commissions now coming under scrutiny with both regulators and industry groups, discount brokerages – particularly RBC – may have to rethink their cost of conducting online trading of mutual funds.

"If embedded commissions are eliminated I expect that discount brokers will simply charge their own fee – either to replace the trailer directly or in the form of some upfront load," Mr. Hallett says. "I don't think the interest in funds is so small that discount brokers could survive without offering them. So in the absence of trailers I think they'll just add their own fee. And I'd bet that they already know what that will look like given the possibility of such a ban."

Canadian investors gain diverse exposure to the stock market through index-tracking exchange-traded funds. A portfolio manager with HollisWealth explains how smart beta exchange-traded funds are different.

The Canadian Press

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