Fred Lum/The Globe and Mail
A fourth investment fund manager may be held accountable for do-it-yourself investors being charged millions of dollars in fees for advice they are not receiving, according to a recent lawsuit filed against Mackenzie Financial Corp.
Two Ontario-based law firms, Siskinds LLP and Bates Barristers PC, have filed a $175-million class-action lawsuit against Mackenzie Financial, claiming that investors who bought the firm’s funds through discount brokers were overcharged because certain funds paid a trailing commission that included a fee for advice.
The funds under review are Series A mutual funds, also known as adviser series or A-class funds. These funds are typically sold through a financial adviser and include commissions for the advice an adviser provides, but investors who buy funds through a discount brokerage do not receive any advice or recommendations and therefore are paying for advice they do not receive.
“Trailing commissions erode investors’ savings and have a substantial impact on their returns over time,” said Michael Robb, a lawyer with Siskinds LLP in London, Ont. "Canadians who invest in mutual funds are entitled to expect that they will receive value in exchange for commissions paid from their savings. What is alleged in this case is that investors receive no benefit in exchange for trailing commissions paid from funds held in discount brokerage accounts, and that it is therefore improper for Mackenzie to pay them.”
This is the fourth class-action suit filed by Siskinds and Bates Barristers that involves Series A funds being sold by discount brokerages. Earlier this year, suits were filed against TD Asset Management, Canadian Imperial Bank of Commerce and the investment arm of Bank of Nova Scotia, 1832 Asset Management LP.
Despite discount brokerages not being allowed to provide advice to do-it-yourself investors, 83 per cent of mutual funds sold through discount brokerages in Canada include trailing commissions, according to a paper released in 2017 by the Canadian Securities Administrators, an umbrella group made up of provincial and territorial regulators. Of the total $30-billion in assets held in mutual fund products in discount brokerages, more than $25-billion remain in fund series that include an advice fee. Series A funds can charge a management expense ratio (MER) between 1.5 per cent to 2.5 per cent. By comparison, Series D funds – those tailored for do-it-yourself investors that strip out advice fees – can have an MER of less than 1 per cent.
Mackenzie declined to comment on the allegations, stating they are “not able to comment on matters that are before the courts.”
According to the statement of claim filed last week, since 2011, Mackenzie’s fund fact documents state that trailing commissions are paid to investment dealers for the “services and advice” they provide to their clients. The term refers to the continuing advice Mackenzie provides to clients regarding their investment in its mutual funds on which the trailing commission is paid.
“However, discount brokers do not and cannot provide investment advice to clients and they do not provide suitability determinations for their clients. Accordingly, the payment of trailing commissions to discount brokers in respect of the Mackenzie mutual funds is improper, unreasonable and unjustified,” wrote the lawyers for the proposed class-action lawsuit in their statement of claim.
The controversial issue has been debated for years and recently led regulators to propose an outright ban on discount brokers being allowed to sell Series-A funds on their platforms. At the same time, regulators were also proposing a ban on early withdrawal fees, known as deferred sales charges (DSCs), on mutual funds.
While the two proposals are separate issues, they are part of the same mutual fund review that was put out for comment in early September by regulators. Shortly thereafter, Ontario Finance Minister Vic Fedeli released a statement opposing the recommendations by regulators, bringing a halt to both initiatives.
While Mr. Fedeli has discussed his opposition to the ban of DSC funds, he has not publicly commented on his position around discount brokerages selling Series-A funds. He has not responded to numerous requests by The Globe and Mail to clarify his position.
Editor’s note: The Mackenzie suit is the fourth class-action filed by Siskinds and Bates Barristers that involves Series A funds being sold by discount brokerages. An earlier version did not identify CIBC as also facing a suit.
Clare O’Hara