It's a shocker that many investors have up until now been denied the details on how much they're paying for investment advice, and how their accounts have performed over the long term.
But let's not dwell on past inadequacies. Under new regulations that went into effect on July 15, investment firms will have to provide personalized accountings of both your investment returns and the dollar amount of fees received in connection with your account. This is your guide to understanding what's coming and how to use it to get a better understanding of your investments.
What's this initiative called?
Regulators call the new rules CRM2 – CRM stands for client relationship model. There was an earlier round of reforms, basically CRM1, that among other things broadened requirements for advisers to ensure they provided clients with investments suitable for their needs and risk tolerance.
When will I see the benefits?
Most investors will see upgrades in fee and performance disclosure in mid-January that cover calendar 2016. It's possible some firms will add the new reports sooner than that. If so, you'll see data for the 12 months to Sept. 30, as an example. Looking ahead, you will receive the enhanced fee and performance reports annually in most cases.
What exactly will I see that's new?
A sample report that the Investment Funds Institute of Canada produced as a guide for advisory firms shows personal total percentage returns for the past year and for longer time frames going back to when the account was started.
Changes in share or unit price are reflected in the guide, as well as dividends and interest paid into your account. You'll also see short- and long-term views of the dollar value of your account, including total gains or losses. Some investment firms have long been reporting personalized rates of return. CRM2 will bring everyone up to that level.
On fees, you'll see an accounting in dollar terms of the money your investment firm receives as a result of having you as a client. Included on the IFIC sample report are:
- trailing commissions, which mutual fund companies pay advisory firms out of the management fees they apply against fund returns; trailers are to compensate advisers and firms for services to fund-owning clients;
- annualized fee-based charges for people who pay their adviser a fee set as a percentage of their account assets (you may have already seen monthly charges listed on your account statements);
- commissions on the purchase of mutual funds;
- administration and trustee fees.
Trailing commissions and fee-based charges are usually discussed as percentages – for example, the trailer for a basic equity fund is usually 1 per cent of your investment. With CRM2, you'll see this information in the more tangible form of dollars and cents.
Three investor-beware moments
1) You will not find out what your adviser makes.
The dollar figures you see in your fee report go to the firm that employs your adviser. The cut your adviser receives depends on the firm's internal compensation model.
2) Investment fees are not included.
The cost of advice is what CRM2 covers, not the cost of the investment products you own. To John DeGoey, a portfolio manager at Industrial Alliance Securities in Toronto and author of The Professional Financial Advisor, this is a glaring flaw. "It's like you're having a new muffler put into your car and they give you a bill for the labour, but they don't tell you how much the muffler cost."
Imagine you own mutual funds with a management expense ratio of 2.2 per cent. Trailing commissions would account for 1 percentage point of the MER, which you'll see as a dollar amount under CRM2. The dollar cost of the remaining 1.2 points of MER will not be shown. If you have a fee-based account, you will be shown the dollar amount of fees paid to your investment firm, but not the fees associated with the products you own.
Graham Isenegger, a portfolio manager with CIBC Wood Gundy in Victoria, says the new disclosure rules could end up misleading investors about the cost of doing business with various types of advisers.
He charges high-net-worth clients a fee of 1 per cent that includes advice and everything else. Under CRM2, his fee would appear to be identical to the 1 per cent trailing commission reported to the mutual fund investor, even though total costs for clients differ significantly.
"We love disclosing [fees] because we're cheap," Mr. Isenegger said. "But this model doesn't give us the opportunity to differentiate on price."
The Ontario Securities Commission says CRM2 is designed to look at fees applied on investor accounts. For fees on actual investments, people are urged to check product disclosures such as Fund Facts for mutual funds.
"When read together, CRM2 and product disclosure will give clients information about costs and performance," Debra Foubert, director of compliance and registrant regulation at the OSC, said via e-mail.
3) There are nuances to the way your returns are calculated.
Your account results under CRM2 will reflect money-weighted returns, which take a real world approach by considering the timing of any money you deposit into or withdraw from your account. The complication here is that results for the indexes you're supposed to use for benchmarking purposes are calculated using a time-weighted rate of return. Here, you see return of an index or product assuming a level amount of money invested.
Mr. Isenegger said client returns should be fairly consistent with index performance in cases where accounts are static. Notable differences will occur where there are large inflows or outflows of money for an account.
A word about taxes
Seeing your annual advisory fees in dollar terms should be a prompt to check whether they're tax deductible. In fee-based accounts, the answer may be yes. "Generally speaking, if you're paying a fee on a non-registered account for investment management, it's deductible on your tax return as a carrying expense," said Jamie Golombek, managing director of tax and estate planning at CIBC Wealth Strategies Group.