This text is taken from the Courrier de l’économie of October 31, 2022. To subscribe, click here.
Why do brokers receive a trailing commission on the sale of a mutual fund or other? asks a reader, Louis Hébert. In this period of starved performance, should we review or cancel these commissions, which are not reasonable if the client is already paying management fees?
The purpose of the follow-up commission is to remunerate the role of advice, suitability assessment and support of the adviser. These commissions are included in the management fees of the investment fund and are paid annually to the dealer or adviser as compensation for the advisory services and follow-up provided over time. They can oscillate around an average of 0.78%. They vary between 0.25 and 1.5% and are part of a management expense ratio generally between 1 and 3%.
That said, in Quebec, the Autorité des marchés financiers retained the proposals submitted by the Canadian Securities Administrators in June 2018 and constituting the centerpiece of a vast public consultation launched in 2012. It was thus decided that the commissions associated with products offered by collective investment schemes will remain, with the exception of those sold by executing brokers, known as discount brokers, since the latter mainly limit themselves to executing orders and do not make recommendations in terms of investment. This regulatory amendment applies to dealers operating an online trading platform that allows investors to buy and sell investments on their own. This measure has been in effect since June 1.
This thinking about the trailing commission needs to be put in the following perspective: investors now have access to a wide range of funds, including no-load investment funds and exchange-traded funds.
It should also be noted that, in the investment fund industry, so-called Series A funds, purchased by most investors, have a higher management expense ratio, including the trailing commission. For their part, Series D funds have a lower ratio, which is explained by the absence of this commission. They are intended for investors using the services of discount brokers, or executors. Investors who have entered into a fee-based arrangement with their advisor are offered Series F funds, which pay no commission to the advisor.
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