October 2016
Disclosure of Advisor Compensation
Beginning October 2016 the Canadian Securities Administrator (CSA) mandates that advisor compensation (the part of the Management Expense Ratio (MER) – the total fee that investors pay in mutual funds) be reported to investors on their statements.
Confused? Here’s the background. The CSA is responsible for oversight of investment products and investment dealers in Canada. A sore point for the CSA is retail investors have no idea of what they are paying when investing in a mutual fund as fees are embedded in fund returns (there are currently thousands of mutual funds available in Canada and billions of dollars invested in them). The CSA wants you to know what you pay. Their argument is investors with this knowledge can make a clearer assessment of the advice/products they receive. This is a sensible proposition – one that is long over due.
There was considerable resistance from the large financial institutions to provide this information. In their view there are numerous reasons why costs should not be disclosed. None have merit and are beyond the scope of this musing. Curiously, these institutions (you know who they are) have extreme reach in the financial world. Originally the CSA wanted full disclosure on “any and all fees” that investors pay. This will not happen in the near term due to considerable push back from the financial heavyweights.
Here is an example of typical mutual fund cost:
$100,000 invested. Management Expense Ratio (MER) for a balanced portfolio is 2.1%. Client pays $2,100 annually. This $2,100 is broken down into 4 components: 1. Management of the fund (typically .5% to .8% of total MER), 2. Administrative costs for buying and selling securities in the portfolio (typically .25% of total MER) 3. Advisor compensation (.5% to 1% of MER) and 4. Harmonized Sales Tax. On statements the investor will see $500 to $1,000 paid to the advisor. The other components of the MER will remain undisclosed (for now). This 2.1% is calculated regularly based on the underlying value of the portfolio. If the investment grows to $120,000 the investor’s cost increases. If the portfolio decreases in value, the cost decreases. The returns shown on statements (see below) are net of fees.
Standardized Investment Performance Reporting
All financial institutions are now mandated to provide performance reporting in a standardized format. Investors need to know three fundamental things: 1. How much did I invest, 2. What is my investment now worth and 3. What has been my annualized return. These three pieces of information are critical to determining the “quality” of products/advice received. This additional disclosure will make for an “apples to apples” comparison from one institution to another. Another change that is long overdue.
Disclosure of Advisor Compensation
Beginning October 2016 the Canadian Securities Administrator (CSA) mandates that advisor compensation (the part of the Management Expense Ratio (MER) – the total fee that investors pay in mutual funds) be reported to investors on their statements.
Confused? Here’s the background. The CSA is responsible for oversight of investment products and investment dealers in Canada. A sore point for the CSA is retail investors have no idea of what they are paying when investing in a mutual fund as fees are embedded in fund returns (there are currently thousands of mutual funds available in Canada and billions of dollars invested in them). The CSA wants you to know what you pay. Their argument is investors with this knowledge can make a clearer assessment of the advice/products they receive. This is a sensible proposition – one that is long over due.
There was considerable resistance from the large financial institutions to provide this information. In their view there are numerous reasons why costs should not be disclosed. None have merit and are beyond the scope of this musing. Curiously, these institutions (you know who they are) have extreme reach in the financial world. Originally the CSA wanted full disclosure on “any and all fees” that investors pay. This will not happen in the near term due to considerable push back from the financial heavyweights.
Here is an example of typical mutual fund cost:
$100,000 invested. Management Expense Ratio (MER) for a balanced portfolio is 2.1%. Client pays $2,100 annually. This $2,100 is broken down into 4 components: 1. Management of the fund (typically .5% to .8% of total MER), 2. Administrative costs for buying and selling securities in the portfolio (typically .25% of total MER) 3. Advisor compensation (.5% to 1% of MER) and 4. Harmonized Sales Tax. On statements the investor will see $500 to $1,000 paid to the advisor. The other components of the MER will remain undisclosed (for now). This 2.1% is calculated regularly based on the underlying value of the portfolio. If the investment grows to $120,000 the investor’s cost increases. If the portfolio decreases in value, the cost decreases. The returns shown on statements (see below) are net of fees.
Standardized Investment Performance Reporting
All financial institutions are now mandated to provide performance reporting in a standardized format. Investors need to know three fundamental things: 1. How much did I invest, 2. What is my investment now worth and 3. What has been my annualized return. These three pieces of information are critical to determining the “quality” of products/advice received. This additional disclosure will make for an “apples to apples” comparison from one institution to another. Another change that is long overdue.