The sweeping changes made last year to investment statements, heralded as a pivotal moment in providing clarity on the cost of investing, has had only a minimal impact on Canadians' understanding of how much they are paying for financial advice and how well their portfolios are performing.
The second phase of the client relationship model – known as CRM2 – was an industrywide initiative introduced last year to provide further clarity in the way investments and fees appear on an investor's annual statement from financial institutions.
Since July, 2017, all Canadian financial firms have been required to provide annual statements that highlight how well investments have performed in dollar amounts, as well as the dollar figure an investor has paid for financial advice. The majority of investment firms began mailing out the yearly reports, known as the annual report on charges and compensation, at the end of 2016.
But six months after the final deadline has passed – and a year since the first annual reports were popped in the mail – investors appear not much better off in understanding what the true cost of investing is.
A 2017 study conducted by Credo Consulting Inc. found that 62 per cent of investors still think that they do not pay for the financial advice they receive, only a five-percentage-point drop from approximately six months earlier.
Another 2017 report by J.D. Power found that only 24 per cent of investors say they fully understood the fees they are paying to their financial advisers.
"Disclosure is not the same as transparency," says Mike Foy, senior director of wealth-management practice at J.D. Power. "The percentages of investors who said their advisers were having those kinds of conversations didn't really significantly change, and again we certainly didn't see any impact in terms of improvement in client's understanding of their fees, which would presumably be the ultimate motive behind the policy to begin with."
Part of the blame may rest with financial advisers, who may have little to gain by increasing their clients' awareness of the fees they are paying. Mr. Foy says financial advisers need to play a bigger role in the communication of fees.
Nearly one-third of investors said their financial adviser didn't explain fees at all, and even among those who did receive an explanation, complete understanding increased only to 35 per cent, suggesting advisers are not consistently doing a very effective job at ensuring their clients really understand the fees they are paying, adds Mr. Foy of the J.D. Power survey.
For Cherise Berman, an advice-only financial planner and principal at Bespoke Financial Consulting Inc., the number of clients still unaware of the new reporting remained high; many clients didn't even know if they had received a statement reporting their individual returns or fees.
"Some individuals just don't pay attention to their statements, while others confess they don't even open their statements on a regular basis," Ms. Berman says.
Ms. Berman says the initiative is a good start but that financial advisers still have more work ahead of them to educate clients about the new information and what it means to each client individually.
"Clients need to take some ownership, too," she adds. "If they are not having periodic reviews with their adviser already, they should be requesting a review at least annually."
A bull-market tailwind
The degree to which the results of CRM2 are a disappointment is hard to determine, as regulators never established measurable goals. But it's clear a lot more work still needs to be done for investors to truly understand performance and fees.
"If the goal of CRM2 was to get performance and fee information into the hands of Canadian investors, that goal was achieved," says Dave Carr-Pries, vice-president of client engagement for InvestorCOM Inc., who led investor research and the development of CRM2 training materials for many of Canada's investment dealers. "But, if the goal of CRM2 was to have Canadian investors understand how they are doing and the cost of investing, then the answer isn't quite as straightforward."
For starters, many Canadians continue to lack the education required to understand what the cost of financial advice is.
"Disclosure is often intended to drive transparency, but it often creates more confusion where people are either overwhelmed and they tune it out, or even when they try to engage with it, they can't quite figure it out at all," Mr. Foy says. "As a result, CRM2 is not achieving what people want it to achieve, which is to make people more aware of what they are actually paying for the services they get."
Financial markets could be partly to blame for investors shrugging off a close inspection of their statements.
"The industry has been lucky in having CRM2 implemented with a very strong bull-market tailwind," says Dan Hallett, vice-president and principal with HighView Financial Group. "Investors are seemingly not paying as much attention to fees because account values have been rising at a healthy clip. And this puts investments on the back burner of household priorities when everything seems to be going just fine. But a combination of future enhanced disclosure and an eventual bear market will likely prompt investors to have a closer look at what they're paying and the value they perceive in their advisory relationships."
Several studies by industry regulators and associations have surfaced over the last year praising the new initiative. But upon closer inspection, the industry still has a long way to go, says Ken Kivenko, a prominent investor-rights advocate.
"Some industry reports are trying to imply we have reached the promised land where every investor knows what they are paying and everyone understands their performance, so why do we need to do anything further?" Mr. Kivenko says. "That worries me. It worries me that [regulators] may try and use what is essentially an information initiative called CRM2 and call it investor protection and then delay other investor protection initiatives that are on the table." Such initiatives would include the best-interest standard, targeted reforms or the ban of embedded commissions – all aimed at reducing potential conflict of interest that may exist.
'Clearly, knowledge fades'
Last fall, the British Columbia Securities Commission (BCSC) published a report that outlined the results of an survey that examined the impact of the new annual investment reports had on those individuals working with a financial adviser. In addition, the BCSC rolled out an educational online tool to help investors navigate and understand the new reports, including a short video and an improved fee calculator. In the report, it stated that 52 per cent of investors who had expressed less confidence and investment knowledge at the outset of the study increased their general understanding of fees after receiving CRM2 reports.
The report also showed that while there was an overall increase in fee knowledge among less-confident investors, that knowledge was short-lived. The report states that while "many" of those investors surveyed in March and then again in June saw their knowledge level increase upon receiving their CRM2 reports, that knowledge later declined during a follow up study several months later. "Clearly, knowledge fades," the BCSC says in the note.
Of 400 respondents who answered questions on specific fees, such as the total amount of fees paid to an adviser, investor knowledge improved among 34 per cent of survey participants, but 35 per cent saw no change. Curiously, 31 per cent said it actually worsened.
"The initial research on CRM2 shows that it is working, but we still have a long way to go," said Pamela McDonald, director, communications and education at the BCSC. "Our research shows that there is an overall positive effect on investor knowledge and behaviour; but what we also want to see is whether the fee reports will cause investors to have a conversation with their advisers about the fees they pay, is there a different mix of products that could work for them, or would they consider changing their firm or adviser. And while that 52 per cent learned more – which is great – they didn't do anything with that knowledge."
In an annual survey released in November, initiated by the Investment Funds Institute of Canada and conducted by research firm Pollara, 72 per cent of mutual-fund investors said they were confident that they understand the fees they pay for mutual funds, a statistic that has held relatively steady since 2011.
Yet, only 30 per cent of those investors with an adviser could "definitely" indicate that a part of the fees charged are used to compensate their financial adviser. Forty-eight per cent of investors said they "think so," while the remaining 22 per cent included those investors that did not believe mutual fund fees went to their adviser or did not know.
The CSA Investor Index – a survey conducted last September by Innovative Research Group for the Canadian Securities Administrators – found less than half (47 per cent) of its survey respondents know exactly how much they pay their financial adviser in the past 12 months, up by only 3 per cent from 2012.
And then there's the MER …
Hugh Murphy, managing director with Credo Consulting, believes CRM2 has moved the needle in investor awareness – even if it's minimal.
"There is a massive incongruence between what is going in an investor's mind and what is going on in adviser's mind; and there is a lot of ambiguity around these results, and CRM2 was designed to initiate better understanding among investors and truth be told our research says it has – but only marginally," Mr. Murphy says. "I think it's going to take a lot of time, a lot of energy and a massive commitment to improve financial literacy among investors."
Along with financial education, another hurdle for investors is understanding that the new reports do not include the management expense ratio (MER) an investor also has to pay when buying mutual funds and exchange-traded funds. The addition of the MER to investment statements has already brought up industry buzz around the possibility of a "CRM3" initiative – although nothing has been formally announced. In an industry that has more than $1.4-trillion in assets under management, the exclusion of the MER means several billions in fees that Canadian investors pay that are being brushed aside when it comes to full disclosure.
"CRM2 is a step in the right direction but it doesn't include all costs, says Tom Bradley, president of Steadyhand Investment Funds, who has been advocating for full transparency for over a decade. "I think we have to keep pounding that away."