Do I still pay advisor fees in a self-directed account?

Simply transferring your mutual funds into a self-directed account won’t lower your fees

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From the January 2017 issue of the magazine.

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Q: I recently moved my mutual funds from my advisor to a self-directed investment account. I’d like to know if the trailer fees on these mutual funds still go to my old advisor. If not, who gets them?

— Anne Doran, Toronto

A: A trailer fee, or trailing commission, is designed to pay advisors for the ongoing service they provide their clients. The commission is typically 0.5% to 1% annually, and it’s included in the management expense ratio of the fund. Not all mutual funds include trailer fees, but the ones sold through advisors and labelled series A, B, or C typically do.

If you purchase a mutual fund through an advisor and then transfer it to an online brokerage, the trailing commission will go to your new brokerage. This is a great deal for them, but not so much for you. After all, the purpose of a trailing commission is to compensate an advisor for planning and advice, but since online brokerages don’t provide these services, they’re collecting a hefty fee simply for holding your fund. If you want to continue holding these mutual funds, check to see if the funds are available in “series D” versions. This class of fund is designed with DIY investors in mind and charge a smaller trailer, typically around 0.25%. The switch to a D-series fund should be free, and there are no tax consequences even if the fund is in a non-registered account.

Better still, if you plan to buy mutual funds in a self-directed account, consider using low-cost fund providers that don’t pay trailer fees at all, such as Mawer, Steadyhand and Leith Wheeler.

Dan Bortolotti, CFP, CIM, associate portfolio manager with PWL Capital in Toronto

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3 comments on “Do I still pay advisor fees in a self-directed account?

  1. Series F that have no trailers can also be available in certain discount brokers.

    Reply

    • Good post and a good point on Series F funds. It amazes me that self-directed discount brokerages can still get away with not offering the Series F version of Canadian bank high interest savings accounts designed for online brokerage accounts. These are powerful tools to earn a bit of a return on uninvested cash (i.e., one’s “dry powder”). The online brokerage providers are earning, typically, a 0.25% trailer fee on the Series A variety of a typical Canadian bank’s high interest savings account distributed through the FundSERV platform.

      Worse still, why TD Asset Management won’t distribute its e-Series of funds through other discount brokerage providers amazes me, especially at a time when there is a movement to low-cost ETFs and the utilization of robo-advisors, which incorporate such ETFs and also provide a higher level of advice? :(

      Reply

  2. Hi Dan,

    Some self-directed brokers, like Questrade, refund trailer fees to clients. Our program is called Mutual Fund Maximizer (learn more about it here http://www.questrade.com/trading/services/mutual_fund_maximizer).

    We do agree, though, that it’s a great idea to review your options as you might save some money.

    Reply

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