Scotiabank eliminates funds with embedded advisory fees for discount brokerage

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Bank of Nova Scotia’s BNS-T online brokerage, Scotia iTrade, is the latest financial institution to stop selling mutual funds with embedded advisory fees in preparation of coming regulatory changes that will no longer allow online trading platforms to collect trailing commissions.

Scotia iTrade stopped all sales of investment funds that include trailing commissions as of March 1, spokesperson Katie O’Dell said in an e-mail.

Earlier this year, Canadian Imperial Bank of Commerce and Royal Bank of Canada were the first to announce they would stop selling any mutual funds that pay trailing commissions in their discount brokerage businesses as of March 7, in order to align with regulatory changes that take effect on June 1.

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Trailing commissions are payments a mutual fund company gives annually to an investment dealer for selling its investment products. They are supposed to compensate financial advisers for providing continuing advice to investors, and are embedded in a fund’s management expense ratio. But discount brokers are prohibited from providing advice to investors under regulatory rules, meaning they have collected billions in commissions without providing the intended service.

In September, 2020, after years of industry consultation, the Canadian Securities Administrators, or CSA, an umbrella group for all provincial and territorial securities commissions, announced the sales ban for discount brokers.

As a result, discount brokerages have been reviewing their product shelves and re-evaluating their mutual fund trading fees, which historically have been waived for mutual funds in favour of collecting trailing commissions from fund companies.

The same platforms typically charge around $10 a trade for stocks or bonds.

Scotiabank is still reviewing its mutual fund trade fees. Prior to March 1, Scotia iTrade waived fees for all mutual fund trades.

Both CIBC and RBC have already begun to charge fees for mutual fund trades. On March 7, CIBC Investor’s Edge began charging an upfront fee of $6.95 a trade when clients buy or sell mutual funds.

RBC Direct Investing, the online brokerage of Royal Bank of Canada, notified clients that, as of March 14, mutual fund purchases are now subject to a fee of 1 per cent of the gross trade amount, up to a maximum of $50. There will be no charge for selling mutual funds on the platform.

Canada’s largest online discount brokerage, TD Direct Investing, will continue to provide zero-fee trades for buying or selling mutual funds on its online platform even after June 1.

Bank of Montreal and National Bank of Canada have not yet released details of when they will stop selling trailing commissions from their platforms.

National Bank launched zero-fee commissions trades in 2021, and spokesperson Stéphanie Rousseau said the company will “keep offering free electronic mutual funds” trades, as it already does for stocks and exchange-traded funds, after June 1.

The coming changes have left many investors confused as to whether they will be automatically converted to a fund that no longer charges the fee, or if they have to provide verbal or written details to their online brokerage to move their funds.

On Friday, the CSA published an order for Ontario outlining the steps required by investment fund managers and discount brokerages to move investors away from mutual fund series with trailing commissions. Other CSA jurisdictions anticipate publishing exemptions shortly, the release said.

The order stated that, in most cases, investors will be switched to an equivalent fund that does not include a trailer fee, or a substantially similar series of the same fund, such as a fee-based F series fund. There will be no fees or tax implications for investors as a result of the switch. Discount brokerages will communicate the trades to investors once completed.

In a small percentage of cases, where an equivalent fund is not available, a management fee rebate will be given to an investor for a limited time.

Discount brokerages and fund organizations will also have a temporary exemption for up to 45 days after June 1 to accept any client who is transferring accounts to a discount broker and may have mutual funds with trailers. The exemption will allow the discount broker to accept and hold the fund, while a switch is initiated into another series of fund.

Laura Paglia, chief executive officer of the Investment Industry Association of Canada, said most fund companies have already identified the most appropriate non-trailer-paying series for each of their funds.

“The only difference for investors in the new series is that they will pay a lower management fee and, in some cases, may have a different distribution policy and/or currency in which the units are reported,” Ms. Paglia said. “In the limited circumstances where a non-trailer paying series of the same fund is unavailable, investors will be provided with information about their options.”

Asset managers, which manufacture the fund products, have begun to develop non-trailing versions of most funds. Last week, Purpose Investments announced it would be transferring its Series D funds into non-trailing funds, such as Series F, which is used for fee-based clients.

RBC Direct Investing said it is working with mutual fund companies to identify any trailer-paying funds held in clients’ accounts so that “applicable mutual fund companies can arrange to automatically switch such units into the equivalent non-trailer paying series.” The switches began last Friday.

“We believe that for the vast majority of our clients, these automatic switches will be the most straightforward approach to alignment with the new rules,” RBC spokesperson Kathy Bevan said in an e-mail.

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