Financial Planning

Good News Coming from the Investment Industry


Mark McNulty


September 21, 2016

September 21, 2016

The Canadian investment industry is finally starting to become more transparent when it comes to your costs and performance. Sometimes when I look at the reports put out by investment dealers, it almost feels like they are trying to confuse you. As an investor what I want is pretty simple – how much did I start with, how much do I have now, what was my investment return, and how much did I pay in management fees?

Securities regulators in Canada have enacted Client Relationship Model Phase Two (CRM2). For the very first time, advisors will be required to include a page in their regular reporting that details the commissions and compensation you’ve paid for investing and advice. Investment firms will be required to follow new disclosure rules covering fees and other expenses, including trailer fees, redemption fees, point-of-sale commissions, switching fees and RRSP administration fees. The requirement is that a report be provided to clients which itemizes each cost and provides an aggregate dollar figure for the relevant 12-month reporting period.

Beginning July 2016, CRM2 also requires your firm to give more information about your returns. Until CRM2 there was no legal requirement to show performance.

The rationale behind CRM2 is to achieve a higher level of disclosure to clients and therefore more transparency with respect to how much the client is paying for financial advice and management. Many fees are currently hidden in the cost of purchase or embedded in commissions that fund companies pay directly to brokers. These sorts of fees are not generally disclosed to the client. The result is that some clients are often not aware of how much they are paying their advisor and thus have no way to gauge value for their fees. And without directly asking the advisor, which can bring up an awkward conversation, there is no easy way for the client to find out.

The new regulations apply to commissioned brokers as well as fee-based advisors, although commission-based accounts are most affected. Many commission customers have no real understanding of the fees they are paying indirectly through commissions, trailer fees and deferred sales charges. The level of disclosure to fee-based clients is certainly at a higher level to begin with, since fees are paid directly by the client to the advisor and much of the relationship between a fee-based advisor and the client revolves around the level of service provided in return for those fees.

This new drive for increased client understanding and the transparency of fees is positive for the industry – both advisors and clients. Initially there may be a period of adjustment and dislocation. There will be occasions where unhappy clients will now be able to ask hard questions about the costs of their advisor and how the fees are affecting their portfolio returns. Certainly many will look for new advisors. Similar legislation to CRM2 has been implemented in Australia and the UK. Subsequently thousands of investment advisors left the business.

Advisors who have been putting clients’ money to work in high-fee investments in order to receive trailer fees will be put to task and will have to grapple with hard questions about the service and performance that clients are receiving in return for those fees. These types of discussions can only serve to raise investor awareness and understanding, and the end result of the new regulations should prove to be beneficial.

The bedrock of the advisor/client relationship is honesty, openness and trust. More disclosure and discussion about fees and costs to the client can only lead to better long-term relationships. The industry as a whole is behind the new regulations, and clients will certainly welcome the new disclosures. While the topic of fees has been gaining attention in the mainstream media, until now there has been no real pressure or, at least, incentive for advisors to talk to clients about the fees they charge. Starting a new relationship with an advisor or with a client with no hidden agenda, and complete disclosure about the costs upfront, means there should be no surprises along the way.PA

Mark is President of McNulty Group, a firm responsible for $250 million of Ontario dentists’ retirement savings. McNulty Group helps professional families transition from a life of successful practice to a stress-free retirement by using a holistic approach of practice and personal retirement planning. In addition to multiple television and radio appearances, Mark is the author of The Transition Coach 2.0–A Canadian Dentist’s Guide to a Perfect Retirement and The $6 Million Dentist: Successful Succession in 7 Modules.