Trailer Fees – Next on The Chopping Block?

We’ve talked a bit recently about CRM2 (Client Relationship Model 2), and it’s impact on the Canadian securities industry. As a quick refresher, CRM2 is the Canadian Securities Administrators (CSA) effort the reform the regulatory framework governing the financial advisory business. It seeks to increase disclosure, transparency, and reporting requirements. We here at Trivest welcome the initiative, as many of these things we have been doing for over 20 years, and it is about time the rest of the industry caught up.

As part of the CSA’s ongoing review of the industry, it appears they have another target, trailer fees. Trailer fees are an annual service fee paid by the mutual fund company (that you are invested in) to your mutual fund/investment advisor. The fee is paid as long as you hold units in the funds, and generally range between 0.25% and 1%. What makes trailer fees tricky however, is historically there has been no way to know that you were paying them, as they were blended into the Management Expense Ratio (MER) of the mutual fund. So while you see that you are paying the mutual fund you are invested in 2% annually for an MER, what you didn’t realize is that 1% of that went to your mutual fund dealer. Not all mutual funds have trailer fees, so there exists an obvious conflict of interest between you and the advisor. Are they selling you a particular fund because it’s the best investment for your situation? Or is it because it pays him/her 1% per year?

It is this conflict that has raised the CSA’s ire, and in a recent consultation paper they noted that the industry has not done enough to convince them otherwise. Industry advocates are obviously opposed, however it may be too late for them. We have noticed that often times when the CSA comes out with consultation papers, it’s much more of a ‘heads up this change is coming’ than any actual consultation. While we welcome the change, it’s impact on the industry is still uncertain. Trailer fees are a huge source of compensation for the financial industry, and if these go away it will cause a lot of people to take serious cuts in pay, or be out of work entirely. Stay tuned.

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