Compliance obligations of investment dealers and their individual financial advisers (i.e. registered salespeople) have ramped up over the past decade.Brad Wynnyk
Last week, the Investment Funds Institute of Canada (IFIC) released two examples of what an annual investment report will look like once regulatory changes come into effect July of 2016, but the lack of performance benchmarks left many investors scratching their heads.
The two IFIC examples provide investors with a sneak peak at two major changes that will be required to appear on their personal annual account reports, including reporting on investment performance and charges and other compensation paid to the financial firms and advisers.
The regulatory changes, also known as the second phase of the Client Relationship Model (CRM2), is being rolled out in three stages. The changes on annual reports are a part of the third and final phase of CRM2, and they include a fee breakdown in dollar amounts including what investors paid for administration and transactions as well as commissions paid by third parties.
But regulators are not requiring registered firms to include benchmark information in investors' annual reports.
A benchmark is commonly used to compare performance. Similar to how students compare a test mark to the class average, an investment benchmark helps an investor understand how well an investment has performed, as explained in a recent IFIC investor document.
"People need to know what to expect," said Mike Bayer, a fee-only financial planner with Strategic Analysis Capital Management Inc, who believes the inclusion of a few broad indexes could help clients overall. "If you are able to show a client what the capital markets has provided, then they have a better expectation as to what is a possible and reasonable outcome."
But putting a single benchmark on an investment statement is easier said than done, said IFIC president and CEO Joanne De Laurentis.
"A client can hold a variety of investments and this is what can make an overall benchmark tricky," said Ms. De Laurentis. "Clients can have equity investments, fixed instruments and GICs. There isn't one benchmark that helps a client understand all of those. They all relate to a separate measurement and would need a different benchmark for each individual investment."
In addition, CRM2 reports use money weighted rate of returns (opposed to time weighted returns), which is different for each investor depending on the timing of their deposits or withdrawals and therefore would be difficult to compare to a benchmark, says Ms. De Laurentis.
In an email to the Globe and Mail, the OSC explained that "the value of a relevant and appropriate benchmark is clear. However, research conducted for the CSA suggested that many investors had trouble understanding benchmarks that did not correspond directly to their portfolios."
Instead CRM2 requires a discussion of how investment performance benchmarks can be used to assess the performance of an investor's investments. Benchmark disclosure was part of the first phase of CRM2, which came into effect July 2014. Phase one stated that the industry must provide a general description of benchmarks to their clients, which can met by adding a description in the relationship disclosure document (which is usually provided to a client on the onset of opening an account.)
While the benchmarks are not required by regulators on individual statements, the OSC states that "firms are encouraged to provide a relevant benchmark of a client's portfolio as a best practice."
The OSC provides a list of several acceptable benchmarks including: the S&P/TSX Composite index for Canadian equities, the S&P 500 index for U.S. equities, and the MSCI EAFE index as a measure of the equity markets outside of North America.
Click here to see a sample report on investment performance
Click here to see a sample report on charges and compensation
Clare O’Hara