More Ways The Investment Industry Is Screwing Canadians

A client reached out to me for advice after her financial advisor at BMO Nesbitt Burns dumped her earlier this summer.  The advisor was looking to scale back his practice and she was one of the unfortunate investors he was “letting go”.

The client, let’s call her Jane, shared the “transition” letter with me and I found some interesting items of note.

“On a further subject of fees, you should know that BMO Nesbitt Burns has implemented a minimum household account fee of $500 per year.  If a client does not produce revenue of $500 to BMO Nesbitt Burns in the 12 month period, the firm will charge $500 less whatever revenue was generated in the client’s account for that year.”

To transfer Jane’s money to another investment firm, BMO would also charge $135 plus GST for handling the paperwork.

Related: Can you trust advice from your bank?

A quick look at her holdings didn’t exactly scream investor friendly, either.  One fund – a Canadian small cap fund offered by Sprott Asset Management – cost an obscene 3.23% per year in management fees.

With new disclosure rules coming into effect this summer, investors are getting more information to help decipher their investment statements and fees.  For example, you might see a new statement saying something along these lines:

“Higher commissions can influence representatives to recommend one investment over another. Ask about other funds and investments that may be suitable for you at a lower cost.”

While this new disclosure may be buried at the bottom of your statement, it’s a step in the right direction when it comes to advising clients of a potential conflict of interest.

More changes are on the way.  Next up is a requirement to deliver enhanced account statements – starting July 2015 – and the following year investors will receive an annual report disclosing all fees, compensation, and investment performance.

Related: Steak knives, yes. Financial advice, maybe not.

A final step to ban embedded commissions – or trailing fees – altogether has yet to be approved.  The investment industry, naturally, is vehemently opposed to a ban on commissions as it claims the decision will lead to fewer Canadians receiving financial advice.

“Removing this form of advisor compensation would not only limit consumer choice, it would also drive advisors out of the industry, making financial advice inaccessible for the average Canadian,” said Greg Pollock, President of Advocis, the financial advisors association of Canada.

The trouble is that many Canadians aren’t getting financial advice in the first place.  The investment industry is designed to put products first, not advice.  And the list of fees, from trailing commissions and deferred sales charges to now what is apparently known as a ‘minimum household account fee’ continues to grow.

We’ll see how well Mr. Pollock’s argument that “consumers prefer to pay for financial advice through fees that are part of their mutual funds” holds up once clients begin to read their statements and see, in real dollars, what they’re paying for their investments and advice.

Related: Why fee-only advice?

One solution is to unbundle advice from product sales, meaning consumers would pay for financial advice separately, in addition to the fees charged for their investments.

This would ensure that Canadians get the sound financial advice they need without the inherent conflict of interest that exists in the current commission-based model.

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  1. Aman Raina on August 24, 2014 at 8:39 pm

    Advice from the financial services industry is no different than from how a car salesman or a cell phone company operate

    We may think we’re making progress because they are lowering fees on their products or eliminating some backend or obscure charge but the industry will figure out a way to get its money on the back end. No different than a car dealer giving you a low interest rate or some cash-back deal but then charging you more for something else or the telecoms lowering your contract term but then charging higher fees for its data plans. The financial industry is seeing with ETF’s their commission schedule falling so they need to make it up somewhere. Enter the $500 retainer fee.

    I don’t think this is going away so what can an investor do? Learn to negotiate. Do your homework and see what the competitors are doing. Get more street smart and have a strategy.

    In your case with BMO-NB, I have coached/prepped people to go on the offence instead of being the willing acceptor. I’d come back and say that I’ve been a loyal BMO family client and if they want to keep my business they better waive that $500 or reduce it or offer me better trading commission schedules somewhere else. The cost of replacing a client is a hell of a lot more to the company than dinging a service charge somewhere.


    • xoxox on August 25, 2014 at 6:48 am

      My experience with the Chartered Banks is that they would be far more willing to waive fees for new, rather than existing customers. The only explanation of such behaviour is that they believe that existing customers are reticent to change banks, due to the financial ties that develop over time (e.g. mortgages, loans, LOC, automatic withdrawals, especially automatic withdrawals). Thus the real profit is gaining new customers and retention will largely look after itself. I’m presuming Jane banks at BMO and, if so, why wouldn’t she just choose to first threaten, and then to leave, if the charge weren’t removed? Given the lack of competition in the Canadian bank sector and the apparent intransigence of their customers (since banks act as if this is the case, they likely know that on average it is), why wouldn’t banks act in this manner. After all they’re in business to make money. I’ve come up against this sort of bureaucratic nonsense a number of times and have thus moved banks several times. But in order to do so one must minimize their ties with their bank. One of the big items that prevents customers from changing banking institutions frequently are the automatic withdrawals and deposits. A few years ago I started where possible to have my automatic payments come off my credit cards. As a result I am more able to change banks when they institute there latest ‘new fee’, or decide that it’s in everyone’s best interest that they remove a service.

    • Echo on August 27, 2014 at 10:42 pm

      In this case, the advisor was “letting her go” and in the letter he offered to pass her along to another advisor at BMO/NB – but she would be faced with the $500 account maintenance fee. Another option was to transfer the account out of BMO/NB (which is what she wanted) but then she’d pay the transfer fee. I’m sure that one could be negotiated.

  2. Stephen Weyman on August 25, 2014 at 8:00 am

    I think the changes that are being made are definitely a step in the right direction. I’m not opposed to advisers taking a commission either it’s just the problem of many advisers being more like salesmen than people offering real financial advice.

    Good financial advice is valuable and good advisers deserve to be paid for it. I also believe that good mutual fund managers who actually DO SOMETHING with their client’s money other than closet indexing is valuable as well and they deserve their cut. The problem for the client is knowing how to find a good adviser and a good mutual fund. Too bad there are so many crappy choices for both out there that it makes the odds of getting a bad one quite high.

    I think a move towards paid advice is a good thing and I think it’s starting to become more common. These new types of fee disclosures will help usher in that change even quicker.

    • Echo on August 27, 2014 at 10:43 pm

      The problem is the crappy funds and advisors know how to find you, while the good ones have to be found through research and knowing what to look for.

  3. Canadian Couch Potato on August 25, 2014 at 9:43 am

    @Robb: Good piece. It’s pretty shameful for an advisor to fire a client and then charge them transfer fees.

    The $500 minimum set by BMO Nesbitt Burns highlights just how difficult it is for smaller investors to get any meaningful level of advice. If you assume an advisor charges 1% (usually anything more than that goes to the fund companies), you’d need at least $50,000 to open an account. And even then, remember that the advisor may well get only half that (the firm takes the rest), and then probably loses another 40% or more to taxes. So there’s very little financial incentive for them to provide more than a token amount of service. And, of course, most don’t.

    That’s why DIY makes so much sense for people with smaller accounts. A cheap balanced fund in an RRSP or TFSA is likely to be better than what most of these advisors are offering, and very simple to manage on one’s own.

    • Echo on August 27, 2014 at 10:46 pm

      @Dan – Thanks! The interesting part here is that Jane had over $300k invested at BMO/NB – no small sum. That’s what made the letter all the more baffling to me. It was like they wanted her to leave.

      • Expert11 on July 17, 2015 at 3:03 pm

        She was probably a pain in the ass client who took up too much time complaining. Advisors don’t dump good clients – only ones that waste time and don’t generate income. $500/year minimum doesn’t seem like that much to me.

  4. David on August 25, 2014 at 10:04 am

    Aren’t these the same people who dumped small business clients, dropped free seniors account? (not sure about that that but one of them did).
    As for investment advisor fees, they make money if your portfolio goes up or down. It would be nice if they got paid when you got paid and reversed their charges when your portfolio went down………….. just a thought…

    • Echo on August 27, 2014 at 10:54 pm

      @David – It was TD that first dropped the free seniors account.

      I’m not sure it’s reasonable for fees to be paid only when the market goes up – that’s largely out of the advisors control. The point shouldn’t be to try to beat the market but to capture its returns minus a small fee and then pay a flat fee for advice.

  5. Steve on August 25, 2014 at 11:05 pm

    Ugh, it annoys me to see such antics by the banks. But I think a fair share of the blame needs to be on the consumer who should take the effort to educate themselves on what they are doing with their money.

    Because honestly, if you pass off all the decision making for your own savings and investments, you shouldn’t be surprised that a huge cut has been taken for your ignorance.

    • Echo on August 27, 2014 at 10:58 pm

      @Steve – No doubt, investors need to take responsibility for their actions (or in-actions). When these new disclosure rules come into play, the investors will still need to read his or her statement and decide whether or not they even care about the fees they pay.

  6. Kyle @ Young and Thrifty on August 27, 2014 at 10:59 am

    Great article Robb. Keep fighting the good fight man. Also, kudos to you for putting your time and money where your mouth is and stepping up to provide that fee-only service that we all have been pushing so much. I’ll continue to send folks your way!

    • Echo on August 27, 2014 at 10:58 pm

      Thanks Kyle – We appreciate the support!

  7. Michael Belfry on August 27, 2014 at 11:35 am

    Are minimum household account fees becoming common? How much are typical account admin fees?

    • Echo on August 27, 2014 at 11:00 pm

      @Michael – this is the first I’ve seen of one. Keep in mind this is a full service brokerage, not a discount brokerage that most of us DIY investors are used to seeing.

  8. Finplanguy on August 28, 2014 at 1:36 pm

    Hey Rob,

    This may take a different track than then other arguments, but how is an advisor that has a minimum account fee different from a fee only advisor that only has on their menu a $1000/plan fee with a $500 retainer for ongoing service if wanted? Aren’t they both business decisions that determine where the best cost benefit for their business lies? Aren’t they both settling a barrier for entrance? We can debate what you don’t like about the traditional advisor model, but a lot of systems don’t allow or accommodate fee only services yet. So account minimums are just one way of valuing their service. In my experience, smaller accounts are usually the more demanding ones, create more work for admin and run a greater liability for a business because they typically are not highly engaged clients. So, often times it makes sense for an advisors business to value their time and protect their business through account minimums. A different way to think about it is that account minimums are actually a step towards your goal of a fee only world because they are laying out a minimum value advisors put on their efforts. My 2 cents fwiw.

    • Echo on August 28, 2014 at 3:01 pm

      That’s an interesting take but I would be more inclined to believe it if the fee came with some kind of explanation around advice and not just “if you don’t produce enough revenue to us”.

      An account minimum based on assets could be justified, but Jane had over $300,000 in her portfolio.

      At an average MER of 2.5%, she was already paying $7500 in fees each year. What wasn’t clear was if the $500 account fee was around trading commissions, or if it included the MER.

      All I know is that she’ll save about $5,000 next year (including my fee) and have a 90% chance of outperforming whatever strategy her old advisor was using.

      • FinPlanGuy on August 28, 2014 at 5:06 pm

        Alright, humour me for a minute so I can try to isolate a discussion topic.

        We know that you believe Mutual Funds are evil. What are the other points you are making about how the investment industry is screwing Canadians?

        Are advisors allowed to transition their business and let clients go without screwing them?

        Are they allowed to set account minimums?

        Are they allowed to charge for paperwork?

        From reading the quote, it’s more likely that it was a form letter that was sent to a whole bunch of clients and that the $500 minimum didn’t apply specifically to her account but was included as information.

        • Echo on August 28, 2014 at 5:58 pm

          Whether or not the $500 fee applied to Jane’s account is irrelevant. Tell me this: Jane’s full service advisor has access to every investment product out there. He also has access to all the academic research that suggests active strategies don’t work. Why, when this 57-year-old widow entrusts him with her retirement savings, would he invest her money in some of the highest-fee mutual funds in the world?

          The bottom line is that as more and more low cost alternatives present themselves, this business model will no longer be sustainable. Then, by all means, charge for paperwork, charge a retainer fee, charge an account minimum. But enough lining your pockets with the highest commission funds.

          • FinPlanGuy on August 28, 2014 at 7:13 pm

            Well I can guess one theory:
            iShares S&P/TSX Small Cap Index ETF MER .55% 5 year RoR 12.08%

            Sprott Small Cap Equity Fund MER (fund facts say 2.5% but we’ll go with 3.23%) 5 year ROR 15%

            Always and never are not good arguments.

            If you see the problem is embedded commissions, say that. Don’t make an argument about minimum fees, and conflict of interests as and say they are other ways the Canadian investor is being screwed as click bait. Those arguments are easily applied in the fee only world as well.

  9. Echo on August 28, 2014 at 8:12 pm

    @FinPlanGuy – Funny, he must have known something that nobody else did in order to pick that winning fund in advance. Very impressive. Luckily, we won’t have to wait for it to revert back to the mean over the next five years.

    @”Terry” – Is your office still next door to “FinPlanGuy” in Lethbridge? You should really try to use a different IP address before pretending to be someone else.

    • FinPlanGuy on August 28, 2014 at 9:01 pm

      Rob, All I’m saying is, instead of talking hyperbole of this outrageous funds MER, maybe don’t go all Fox news on the issue about how this lady was screwed when the one example you gave she got significant value for the decision. I know as well as you that this isn’t always the case but maybe phrasing it, ‘hey this lady was lucky, a lot of funds don’t beat the bench mark’ instead of ‘the world is getting screwed’ may be a little more realistic.

      Most firms don’t have the ability yet to go solely fee only. And even the Fee Only world already exhibits all sorts of conflicts of interest that would disqualify a bunch of firms from carrying that title. But to question the integrity of all advisors working in the industry is a little extreme.

      • Echo on August 28, 2014 at 10:17 pm

        I never said Jane got screwed. I simply pointed out three ways Canadian investors were getting screwed – we pay the highest mutual fund fees in the world, we have to pay a fee to transfer our money to another advisor, and now some investors will have to pay an account minimum if they fail to produce enough revenue to a firm or advisor.

        Call it hyperbole if you like, but Canadian investors can’t afford to sit on their hands and wait for fees to start falling. We need to be vocal and encourage change.

        Charles Ellis, considered the dean of the investment management industry, said the future for many portfolio managers is clear: “Lots of them are going to have to go find something else to do, because the line of work they originally trained for will be fading away.”

        One obvious destination, he says, is financial planning.

        In short, many stock pickers should get out of the business of managing investments and get into the business of managing investors.

        BTW – I prefer The Daily Show to Fox News.

  10. FinPlanGuy on August 28, 2014 at 11:02 pm

    I always pegged you as more of a Colbert guy than a Daily Show guy. Guess I was wrong.

    I think you’re being a little disingenuous when you say you say you’re not claiming ‘Jane’ got screwed. When you title a post “More Ways The Investment Industry Is Screwing Canadians” and use Jane’s example of high MER’s, transfer fees, and account minimums, I think it’s pretty clear you’re inferring Jane got screwed.

    Find me an investment brokerage that doesn’t charge a transfer out fee. Quest Trade charges $150, RBC direct charges $135, iTrade charges $150. If it’s just Canada screwing investors et’s go to a fully unbundled country that isn’t being screwed.
    UK Investors get charged anywhere from £25/holding to £180 for whole accounts. So that argument doesn’t hold water.

    You have created a minimum fee in your business. Why do you begrudge another business from saying, ‘yeah we’ll provide you service, but it will cost a minimum of $500/year’ In both cases they can decide if they are willing to pay it and if they receive any value for it. Why don’t you offer a service that cost’s less? Probably because you believe your time, knowledge and experience is worth something. Why is it any different for an advisor that lives in an embedded fee world?

    I would think account minimums would be the last argument you would make, it is clearly laying out a move towards fee only that you’re pushing for. I believe that the debate should revolve solely around if they receive value for the fees that they pay. Believe it or not, the answer is going to be ‘yes’ from a lot of people.

    • Echo on August 28, 2014 at 11:48 pm

      Is there any evidence suggesting that investors are indeed getting value for the fees they pay? Separate the cost of owning a fund from advice-related fees so that investors can make a better decision on whether or not they’re getting “value”.

  11. FinPlanGuy on August 29, 2014 at 12:12 am
    • Harry on August 31, 2014 at 9:21 am

      The mutual fund/advisor industry took off over 30 years ago. A high percentage of boomers have or have had advisors. Will this high percentage of boomers have a retirement nest egg that will allow them to maintain their standard of living for the rest of their lives? I would argue that the investment industry has not produced a generation of investors that will all be retiring comfortably.

      CIBC introduced a minimum household service fee schedule last year.
      Although you can’t paint every advisor with the same brush, you can certainly paint the industry with it!

  12. Marc on October 12, 2014 at 4:43 pm

    I’ve started to notice this becoming more common in the UK where brokers are increasingly ramping up their inactivity & management fees. It’s making it quite difficult for long term investors.

  13. Anonymous on November 13, 2015 at 2:40 pm

    I skimmed over the comments/article and everyone is making valid points. I am an advisor in the MFDA world (Mutual Funds) from Alberta and I have seen a VAST variety of how advisor’s have screwed over their clients. I want to say off the top of my head there are around 70,000 “Advisors” in Canada, some pure money management, some planners, and some insurance advisors. My guess is 25% of them operate in the best interest of their clients, regardless of compensation, amount of work involved ect… which is around 17,500 advisors. There are designations that advisors can get which are supposed to offer you security or peace of mind they know what they are doing, but there are around 18,000 CFP designated advisors in Canada and I know that some of them do NOT act in the best interest of their client.
    To the discussion of fee’s, there are two worlds… the MFDA world and the Brokerage(IIROC) world. The MFDA world has always been paid through embedded fee’s and trailer’s, usually 1% goes to their investment dealer and they are paid a percentage of that 1% depending on how much money they have with their dealership. IIROC is more of a fee-for service, you pay transaction costs, trading fee’s, annual fee’s plus they usually have an annual % fee for assets under management. Typical rate for an advisor is 1% but you do see some brokerage advisors charging 1.25% + trading costs.
    My business partner and I have a fee structure, built by household but also family assets (relatives). The more money you have with us our fee’s go down. We implemented a 1.25% fee if you have under $100,000 because as everyone mentioned it does not make sense to take on anyone with less as we are running a business. Example. Someone has $30,000 to invest, our fee(Dealership) is 1.25% and we take a comission of 80% from that. So, in a dollar figure the client is paying $375 to our dealership and we take home “Gross” before our office expenses, payroll for assistants, ect… is $300 a year. Does not make sense if you are running a business.

    I would be happy to answer any questions anyone has on this topic, as I am trying to educate consumer’s/potential clients as much as possible for full disclosure and transparency.

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