PETER DOLEZAL: Investment reporting improves

Time will tell if the individual investor will win out in the end

Finally, good news for investors. By July 2016 every investor whose portfolios are managed by a Canadian investment house will be receiving a meaningful statement at least once annually.

The Canadian Securities Administrators (CSA) has approved a new Client Relationship Model, dubbed CRM2. All investment dealers across Canada will be forced to provide standardized and much more detailed disclosure.

The new rules will require that clients receive a detailed listing of all charges assessed against each account managed by the firm. This will include all commissions, management fees and any other charges. For the first time each account holder will see clearly the exact percentage of his account eaten up by fees. Many of today’s investors, some extremely sophisticated, have little insight into such fees and their negative drag on portfolios simply because the information is very difficult to ascertain.

Another welcome change included in CRM2 is a new requirement for full and clear disclosure of all investment returns. Today, the degree of such disclosure is largely at the discretion of the dealer.

Most investment houses provide information on year-to-date total returns of a portfolio. Some provide information on longer-term returns, usually for three and five years. A few also provide meaningful performance comparisons to relevant indexes. Very few provide information on the account’s total annual return average since its inception. The best dealers not only provide a breakdown between the annual income earned (yield) within each portfolio but also separate it from the capital appreciation of the account.

Finally, CRM2 will ensure every client receives a standardized and extensive insight into how his investments have performed. He/she will be able to make valid comparisons between his investment performance and that of Index Funds and Exchange-Traded Funds (ETFs) — both of which, unlike mutual funds, essentially track a chosen index, rather than attempt to beat it.

These changes are long-overdue.

They will empower investors to ask their investment advisor critical questions and to make informed decisions on whether the investment returns they are receiving justify the fees they are paying.

A prediction: Once this information becomes available to all clients, we will see an even more substantial shift from mutual funds to index funds and ETFs than is already occurring. Canadian mutual funds, which as a group charge the world’s highest fees (MERs), will be forced to trim charges (from their current average 2.4 per cent for equity funds), to stem the loss of clients. Today for example, the average Canadian equity mutual fund annually charges about one per cent more than does the average fund in the U.S.

There is no justification for the higher charges.

They exist because investor information is so limited that most clients are unaware of the heavy price they are paying, often for spotty results.

The CSA is still contemplating a further innovation — whether to eliminate “embedded compensation” — commonly known as “trailer commissions.”

As long as the client holds a mutual fund, these trailer fees, often amounting to one per cent for an equity fund, are currently paid to the financial advisor from the mutual fund’s MER. The advisor receives this annual fee regardless of how much or how little financial advice is dispensed.

This additional change would allow clients the option of eliminating this charge if they decide they do not require it. In many cases today the advice received is minimal compared to its high cost. Canadian banks have in fact attracted many individual investors because they do not charge trailer fees, thereby offering a lower MER than do most investment houses.

Eliminating automatic trailer fees would further empower investors in making appropriate choices pertaining to not only their investments, but also to the costs associated with those investments. The investment industry is lobbying hard to convince CSA that this further change should not take place. Time will tell whether the interests of the individual investor will win out over those of the industry. Stay tuned!



A retired corporate executive, enjoying post-retirement as an independent Financial Consultant (, Peter Dolezal is the author of three books, including his recent Second Edition of The SMART CANADIAN WEALTH-BUILDER. Contact Panorama Rec Centre to register for Peter’s Elder College Fall session– Financial & Investment Planning for Retirees & Near-Retirees (Thursdays, September 18 to October 16).