New charges and payment reporting
Quinn Waddington - Nov 22, 2016
You may have been hearing more about CRM2 in regards to your investments over the last few months and if you haven’t then I can assure you, you will in the New Year. This is because the Canadian Securities Administrators (CSA) have introduced new
New charges and payment reporting
You may have been hearing more about CRM2 in regards to your investments over the last few months and if you haven’t then I can assure you, you will in the New Year. This is because the Canadian Securities Administrators (CSA) have introduced new requirements (Client Relationship Model 2) with the aim of increasing transparency and consistency on the costs and performances of investments.
Over the past couple of years, the CSA has increased transparency by mandating different disclosures and trade confirmations both before and after trades (CRM1) but in July 2016 the CSA made the most impactful changes by mandating separate reports on both the charges and compensation, and the performance of investments. Most firms have decided to send these annual reports in January 2017 for the year-ending Dec. 31, 2016. Although there are a number of misleading issues about these new reports (see below), I do believe it is a step in the right direction and will at least get investors asking whether the value of the services they receive are worth the costs.
I will speak about the performance report in a future post but the report on compensation and charges will breakdown all of the costs associated with operating your accounts, including everything from financial planning and portfolio management costs to the taxes and interest charges. I believe this is a great step towards transparency but as mentioned, any undertaking this large is bound to have issues, including the following.
-One large notable cost is excluded from the report, the management fees charged by the mutual fund companies. This can often be as much a 1.5% or more of your portfolio value so excluding it seems bizarre. The reason I was given for the exclusion was that the report is to outline the fees going to the investment firm and of course those management fees go to the mutual fund company, so they are excluded. To me the report is to show investors their total costs so I find the exclusion of what could potentially be their largest cost misleading.
-The categorization of 3rd party payments can also be misleading because they include trailer fees which are technically paid by the mutual fund companies but come directly from the value of your mutual fund positions. Trailer fees are by definition to compensate advisors for ongoing client service so I would rather see these costs included in operating fees (along with the management fees above) so clients can compare total costs more accurately. There are certain 3rd party payments that clients don’t pay that can also make things misleading but I think full transparency is the better option on these as categorizing these payment types would be too difficult.
Overall, I believe the charges and compensation report will have many people shocked about the amount of costs on their accounts, and remember that some of the costs may not even be included. It will have investors wondering if the value they are receiving from their advisor and investment firm/bank is worth the costs they have been incurring. If you haven’t heard from your advisor and you are being charge 2.5% then I think you know the answer.
Contact me today (or in January when you receive your report) and we can help determine how to lower your investment costs.
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