Banks Repaid Millions To Overcharged Investors. That Got Me Thinking

CIBC agreed to repay $73 million to more than 80,000 customers who were overcharged for their investments since 2002. The majority of those affected were in fee-based accounts and were found to have paid double fees on some investments that had embedded commissions. Meanwhile, some 24,000 CIBC clients were not told they qualified for lower-cost mutual funds because of the size of their investments, and were instead sold similar funds with higher management expense ratios.

Incredible, yet not surprising when you consider this is the same bank that makes its senior clients apply for free banking rather than granting it automatically when clients turns 60.

It should be noted that CIBC self-reported the fee problems to the Ontario Securities Commission when it uncovered the issues during an internal review. The OSC has settled similar voluntary cases with three Bank of Nova Scotia divisions, three subsidiaries of TD Bank, and with mutual fund giant CI Funds, which repaid $156 million to 360,000 clients who bought mutual funds over a five-year period.

How many other ways will Canadian investors get fleeced by an industry that cares more about protecting its compensation model than it does about looking out for the best interest of its clients?

When will the Canadian Securities Administrators (securities regulators) finally get around to banning trailer fees – the embedded commissions that puts advisors in a clear conflict of interest and which a mountain of evidence suggest influences fund recommendations?

Banks overcharging investors

Since we’re talking about overcharging investors, here’s a thought:

The banks are suddenly feeling so ethical and generous by volunteering to repay fees that were overcharged. So let’s have some fun (or maybe cry a little) and apply that to the more than $1.32 trillion (!) that Canadians have invested in mutual funds.

We already know that Canadians pay some of the highest mutual fund fees in the world – the Investment Funds Institute of Canada estimates the average total cost of ownership of mutual funds for clients is 2.2%.

We also know, thanks to Professor Douglas Cumming’s research on mutual fund fees, that the average trailer fee on a fund is 0.3%.

Let’s say Canadians demand that the average mutual fund fees be reduced to 1.5%. That’s lower than many other countries, but still higher than fees in Australia and the U.S. (according to Morningstar).

To get there we’d have to ban trailer fees (saving 0.3%) and maybe by doing so we’d miraculously find that dealers no longer have the incentive to sell higher fee funds and so the average comes down to 1.5%.

How much will Canadian investors save if this hypothetical scenario came to pass?

  • $1.32 trillion x 2.2% MER = $29,040,000,000 ($29.04 billion) in fees paid by Canadian mutual fund investors.
  • $1.32 trillion x 1.5% MER = $19,800,000,000 ($19.8 billion) in fees paid after lowering the average MER by 0.7%.

That’s a savings of nearly $10 billion. Now the IFIC says that 4.9 million Canadian households invest in mutual funds, so if we divide the amount saved by the number of households then each household should receive a nice $1,885 rebate.

Final thoughts

Mutual fund assets continue to grow because for the Canadians who want to save and invest, the easiest way for them to do so is by visiting a bank advisor or mutual fund salesperson. But those advisors have a conflict of interest, selling their firm’s funds that may be suitable but not in the best interest of their client because of high product fees and incentives that reward the seller.

Lower cost products such as ETFs exist, but investors have to do their research and go it alone (or use a robo-advisor service) to realize the savings. That’s why, despite widespread attention over the last 5-10 years, the total Canadian listed ETF assets is only $107 billion, or just one-tenth of the mutual fund market.

So while investors patiently wait for securities regulators to ban trailer fees, I think Canadians should demand to be repaid the $10 billion that they’re being overcharged each year from mutual fund fees.

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  1. rhonda on October 31, 2016 at 4:56 am

    Do some banks disclose both the MER and the trailing commissions, but bundle it into 1 fee?

    Robo investing sounds interesting….but how can you trust the investment advisor’s competency and education?

    The low interest rates are killing my retirement $$.
    I turned 66 this past September, but I am starting part time.

    Even with the RRSP, I still owe taxes of approximately $10,500. I have no deductions,and the alimoney is not taxed at source.

    i always look foreward to your blog.

    • Sue on October 31, 2016 at 5:46 am

      Rhonda.. I too am in my late 60s and receive spousal support that is not taxed at source. A way of dealing with the tax implication is to set aside a monthly amount for paying the income tax that you will be required to pay when you file. I pay instalments quarterly just to get it out of the way. So monthly spousal support minus monthly income tax owing equals ” money to use as you wish”. Works of me!

    • rhonda on October 31, 2016 at 7:30 am

      Thank you.That was a quick reply.
      .I have saved the equivelent of the tax into a my savings acct in the past…there is no excuse to not do that again.
      I do use that (double) to help my adult son. He is not well and hasn,t worked 1n 3 years.
      Anyway…i will do the tax savings into a separate acct…starting Oct 30 when I get his check and when I cash it…..and I if I start living on what I will be living on in my retirement I will know in Sept…..I turn 67 next September if I can manage, I would like to go 18 hours a week….

      • Sue on October 31, 2016 at 3:04 pm

        Good luck with your saving goals. Setting realistic goals is always helpful and it sounds like you are heading on the path to a happy retirement.It is a great place to be and I for one am enjoying it!

  2. David Toyne on October 31, 2016 at 7:12 am

    Robb, in addition to ETF’s, lower cost options involving mutual funds also exist. TD E-Series index funds could be a good option for people using PAC’s and direct to investor fund companies like PHN, Mawer and Steadyhand provide advice, active management and low fees. Each of these firms charge around 1% (depending on the size of the investment). Robo-advising can get close to 0.75%, also depending on size and which firm, so an investor’s performance would be the index MINUS 0.75%. Some people really need someone to speak with as they work on their investment plan.

  3. Justin on October 31, 2016 at 11:59 am

    Robb makes several good points. Further to the comments on CIBC and free senior accounts, I gladly saw seniors were backpaid for the application error mentioned while sitting in that desk. I am sure the systems were not assisting in relaying that error to employees. Though banks are painted as devious in certain aspects, the fact they are flagging error and stepping up is the key point. I hope the trend continues to uphold what is right for clients.

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