"I think you should reflect on how much disclosure is enough," the head of the mutual fund industry's lobby group told me the other day.
We were talking about proposed rules from securities regulators that would require investment firms of all types to disclose the dollar amount of fees paid by investors, and their personalized rates of return.
"We're totally supportive of both of those points," said Joanne De Laurentiis, president and CEO of the Investment Funds Institute of Canada. "We think it's important for the investor to understand what they're paying for a product they're buying, and then how that product is serving them."
But here's the thing about disclosure, Ms. De Laurentiis said. At a certain point, the cost to investors of providing it exceeds the benefits. That's the case with proposed new disclosure rules, she argues. "It's a lot of information, and we're not really sure it's going to deliver value."
How much disclosure is enough? It's a more complex philosophical question than you might think. On one hand, disclosure is like good health – you can't have too much. On the other, bombarding investors with information can cause them to tune out entirely.
And then there's the cost factor. If the fund industry is required to follow the proposed disclosure rules as they stand, won't the implementation costs be passed along to investors? "Of course," Ms. De Laurentiis said. "It has a big cost impact."
So I reflected on the disclosure question, as she suggested. And I decided that when it comes to how our money as investors is being spent and being managed by the financial industry, it's worth paying more to know more.
Provincial securities commissions first issued a proposal for improved disclosure of returns and fees in June, 2011, with an invitation for comments. Revised rules were issued a few months ago, and the comment period on them ends on Friday. Regulators expect to start phasing in the new rules in the first half of 2013.
The proposed rules are among the most important and widely inclusive measures that regulators have ever taken on behalf of individual investors in Canada (it's not a high hurdle). They roll back decades of investment-industry hegemony over the information investors receive and introduce a whole new level of accountability and transparency. They are, in a word, overdue.
The fund industry already provides a fair amount of disclosure to investors, and it does so in plain language documents that do quite a good job of communicating financial ideas to everyday people. Where regulators and the fund industry differ is in the proper level of disclosure of commissions that are paid by fund companies to investment advisers who sell their products. These so-called trailing commissions are a big component of the fees investors pay to own funds, and they're designed to compensate advisers for ongoing client service.
Current fund industry documents explain the trailing commission as a percentage of your invested assets in a fund – 1 per cent for an equity fund, typically, and 0.5 per cent for a bond fund. Ms. De Laurentiis said that's a sufficient level of detail. "We think it gets to the point, which is informing investors. It gives them the information they need to say [to an adviser], by the way, tell me more about what you're being paid."
The proposed disclosure rules would require fund companies to show the amount of trailing commissions paid by investors in dollar terms. The data would appear on an annual client statement near a report of personalized returns since the account was set up. That's a big improvement on the status quo at many firms, where you're only shown how much your account has changed since the last statement.
IFIC says the proposed requirement for reporting personalized rates of return requires too much complexity. Another complaint is that the new rules would be tougher on mutual funds than other investments.
There's roughly $803-billion sitting in mutual funds today, about 25 per cent of total invested money in Canada. But if you look strictly at the country's registered retirement and education savings plans, mutual funds account for roughly half the total value.
How much disclosure is enough for the investment vehicle of the investing masses? The amount regulators are proposing sounds just about right.
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Show & Tell
Here's a list of what investment firms would have to disclose in annual client account statements under new rules proposed by securities regulators:
-Total amount, in dollars, that a dealer or adviser was paid for advice and products sold;
-Returns, in dollar and percentage terms, for a client's investments in the current year and longer periods;
-Some commissions on bonds.
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Rob Carrick