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New disclosure rules on investment fees may make it difficult to compare costs among financial advisers.

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New disclosure rules on investment fees may make it difficult to compare costs among financial advisers.

The fee and performance disclosure framework known as CRM2 aims to clarify what Canadians pay for investment advice.

The new statements that many investors will be receiving early this year, however, exclude other kinds of fees, particularly management fees on mutual funds.

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That means that those advisers disclosing the full costs of ownership to their clients, either by regulation or by choice, may unfairly appear less competitive than higher-cost peers.

"Still not a fair fight," said Stephen Takacsy, chief investment officer at Lester Asset Management, a portfolio-management firm based in Montreal. "This is a step in the right direction, but we're not quite there yet."

The disparity comes down to the different types of advisers available to Canadian investors.

Most investment advisers are licensed by the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Funds Dealers Association (MFDA). They typically receive commissions for their clients' holding certain securities or funds. The final investment decision lies with the clients themselves.

It's that relationship that is targeted by CRM2. Canadian investors have long demonstrated a feeble understanding of the fees they pay. The new statements aim to reinforce the cost of advice. That expense often takes the form of a trailing commission on mutual funds, which is split between the dealer and the adviser, and typically amounts to 1 per cent on equity and balanced funds.

The new disclosure rules set out by Canadian regulators require firms to clearly report those charges in dollar terms.

But trailing commissions are only one component of the typical mutual fund fee arrangement. The larger part of the management expense ratio goes to the fund provider. And those fees, amounting to several billion dollars' worth paid in Canada each year, will not appear on most statements.

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Some firms, however, choose to disclose management fees, but are not required to under CRM2.

"Firms like ours are going to report all costs, while most firms will do the minimum, which will just be the service and advisory costs," said Tom Bradley, president of Steadyhand Investment Funds.

The all-in fee on Steadyhand's Founders Fund, for example, is 1.34 per cent, which includes all of the firm's fees and taxes, as well as the fees paid to managers of the underlying funds.

On first glance, another firm complying with CRM2 may appear cheaper than Steadyhand. But that comparison would not account for management fees, which, if factored in, would easily tip the scales in favour of Steadyhand, in the average case.

Other firms that similarly report fees voluntarily include Leith Wheeler Investment Counsel, Mawer Investment Management, Pembroke Management, and PH&N Investment Services.

Another group of advisers that may similarly suffer by comparison under CRM2 includes portfolio managers, who have the authority to make investment decisions on behalf of investor clients.

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They are held to higher fiduciary standards than the average adviser, required to always act in a client's best interest, and are typically fully transparent in fee disclosure.

"There are no secrets there," Mr. Takacsy said. "That represents 100 per cent of what they're paying."

The same can't be said for the statements most financial advisers and their firms are now starting to distribute.

Still, CRM2 undoubtedly represents progress, said Katie Walmsley, president of the Portfolio Management Association of Canada.

"It's a big improvement – a lot more detail and much more transparency," Ms. Walmsley said. Too much information could risk overwhelming Canadian investors, she added.

"The regulators I think went as far as they could in moving this forward and levelling the playing field in terms of consistency in reporting."

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