The anticipation of regulatory changes that are coming to the investment community in July, 2016, has already created several myths that need to be debunked.
These changes – known as the second phase of the client relationship model, or CRM2 – will provide investors with greater transparency in the fees they pay for financial advice.
But regulatory changes can be confusing for the average investor. In order to help increase public awareness, the Investment Funds Institute of Canada (IFIC), compiled a list of frequent factual errors observed around the timing and content of the new reporting requirements.
Here are the top six:
Myth No. 1: CRM2 applies mainly to mutual funds.
Fact: CRM2 applies to more than mutual funds. It applies to all securities – including stocks, bonds and exchange-traded funds – and applies to all investment dealers and portfolio managers registered with any Canadian securities commission. Regulators are also encouraging firms to include non-securities products in client reporting, such as guaranteed investment certificates, although this is not mandated by CRM2.
Myth No. 2: Account statement changes take effect in July, 2015.
Fact: Statement changes were supposed to take place this month. However, this date was extended by regulators to come into effect as of Dec. 31. (Part of CRM2 includes changes to statements; these changes include enhanced disclosure about market value and the cost of each security.)
Myth No. 3: Investors will begin receiving the two new annual reports as of July 15, 2016. The two reports will include the cost of advice and the annual fund performance.
Fact: The rule comes into effect on July 15, 2016, at which point dealers have one year in which to begin sending these reports to their clients. In the majority of cases, investors will begin receiving these reports early in 2017. This is because most firms are choosing to provide the information on a calendar-year basis.
Myth No. 4: The report on charges and compensation, which includes the cost of advice, will tell investors how much their adviser is being paid.
Fact: The report on charges and compensation provides details about the money received by the investment firm over the previous year to provide services to the investor. A portion of this money is paid as compensation to the investor's financial adviser. The report on charges and compensation does not provide a breakdown of how much is paid to the adviser and how much is kept by the dealer firm. Each firm determines this differently.
Myth No. 5: The report on charges and compensation will tell investors the total cost of their investments.
Fact: CRM2 focuses only on the amount paid either directly or indirectly by an investor to the dealer firm. This will include trailer fees. For mutual funds, it does not include the amount paid to the investment manager. For an understanding of the total cost of a mutual fund, investors can review the fund's management-expense ratio (MER).
Myth No. 6: The new report on investment performance will provide benchmarks so that investors can evaluate their personal returns based on a benchmark.
Fact: The report on investment performance will not provide benchmarks. The report focuses on the individual investor's personal rate of return (ROR) and this cannot be compared to a benchmark. / The personal ROR is based on the individual investor's specific deposits into and withdrawals out of his or her account, as well as dividends and interest earned within the account and changes in the value of the securities held within the account. Since each investor has a different combination of deposits and withdrawals, each investor could have a different ROR.