Fund Investing

In a bear market, do investors really want to know?
By Steven G. Kelman | 15/08/11

Recently the Canadian Securities Administrators, the organization consisting of all provincial and territorial securities regulators, proposed minimum standards of cost disclosure and performance reporting to investors.

About the Author
Steven G. Kelman is president of Steven G. Kelman & Associates Limited. His company provides specialty publications and training for the mutual fund industries. Steven is the author of several personal finance books and is author or co-author of courses offered by the Investment Funds Institute of Canada, including the Ethical Conduct and Behaviour continuing education course and the Labour-Sponsored Investment Funds course. He received a B.Sc. from McMaster University, an MBA from York University and holds a Chartered Financial Analyst designation.

The CSA wants all investors to "receive clear and complete disclosure of all charges associated with the products and services they receive, and meaningful reporting on how their accounts perform."

It is almost certain that the proposals will be adopted because IIROC and the MFDA, the self-regulatory bodies responsible respectively for investment dealers and mutual fund dealers, have proposals in step with the CSA.

Consequently, investors will be informed of costs when a recommendation is made and will receive an annual summary of all charges and compensation received by the dealer. The annual statements will include the original cost of each security held and annual account performance.

Specific new items dealers must provide to clients will include more disclosure on trailing commissions and deferred sales charges. The document also provides guidance to dealers and advisors about what the regulators consider inappropriate switch transactions designed to provide increased compensation to the advisor.

All this is commendable, and indeed some dealers and advisors already provide full disclosure of performance information of the type the regulators want to make mandatory. Furthermore many firms provide online access to accounts so investors can get information on their accounts on a daily basis.

I assume that some dealers who don't provide performance information to clients don't have the systems in place to produce it. And if they can't produce this information, their advisors may not have the client performance information they need to provide, say, rebalancing recommendations to their clients on a timely basis, so this should be positive for clients of these firms.

As far as charges go, the regulators' concerns are that many investors don't understand or are not aware of all of the charges related to their investment products and services. The CSA says, "These charges are often buried in the cost of the product or in the prospectus, or are only mentioned briefly at the time of account opening."

That may be the case, but account opening documents, prospectuses, offering memorandums, information folders and other disclosure documents provide this information. Investors have some responsibility to review this material. Sticking it on a statement doesn't guarantee that an investor will read it.

In fact I will bet that in periods of dismal stock market performance, some investors won't even open the envelopes containing their statements.

Even so, the CSA does address what is apparently a concern that many investors don't understand the fees they pay -- in particular sales charge options.

The regulators propose that the annual statement identify any securities to which a deferred sales charge applies. Dealers will have to disclose the charges clients will have to pay on a purchase or sale before it makes a recommendation or accepts a client's instruction.

Moreover, if a dealer receives trailing commissions on investment funds held by a client, it has to disclose that amount in a statement similar to "We received $X in trailing commissions on the investment funds you held during the period. Investment funds pay managers a fee for managing their funds. The managers pay us ongoing trailing commissions from that management fee for the service and advice we provide you. The amount of the trailing commissions depends on the sales charge option you chose when you purchased the fund. As is the case with any investment fund expense, trailing commissions affect you because they reduce the amount of the fund's return to you."

If you deal in the bond market you are almost certainly aware that dealers act as principal. Dealers will now have to disclose any compensation and include a sentence in the annual account statement similar to "For some of the fixed income securities purchased or sold in your account during the period covered by this report, dealer charges were added to the price in the case of a purchase or deducted from the price in the case of a sale."

My view is that the statement will be meaningful only if costs and performance of all investment products sold by an advisor are included in a consolidated statement for each client. This should include insurance products like segregated funds, which are not included in the CSA proposals but nevertheless form part of the client portfolio.

It will be interesting to see the views and recommendations that the regulators will receive during the comment period which ends Sept. 23, 2011. As MFDA and IIROC are in step with the CSA, we may see concerns from firms that aren't members of the self-regulatory organizations and from smaller dealers and individual advisors who have concerns about the cost of implementation.

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