Knowing mutual fund costs could rattle investors
New transparency rules might rock market, financial experts say
TORONTO — New rules that took effect Tuesday will make it easier for Canadians to understand their investments and associated fees.
The rules, dubbed Client Relationship Model, are being rolled out over the next two years and are an effort by the Canadian Securities Administrators to provide better disclosure and to clarify how financial advisers are compensated.
The mutual fund industry says it’s embracing the regulations, but will Canadians continue embracing mutual funds when added transparency reveals the true costs and performance of their investments?
“What there will be is a better discussion between advisers and their clients as to the value that advisers and the value that mutual funds bring to investors and a bit more of a discussion about the alternatives,” said John Adams, the second vice -chair of the Investment Funds Institute of Canada and CEO of PFSL Investments Canada.
Advisors and purveyors of mutual funds serve an important market, particularly those with smaller amounts to invest, he added.
David Kaufman, president and CEO of Toronto-based Westcourt Capital Corp., doesn’t foresee Canadians turning away from mutual funds. “Canadian investors, the vast majority of whom invest through bankowned brokerages, just don’t have as much flexibility with respect to what kind of product they’re interested in,” he said. “They just don’t have enough choice to turn their back on mutual funds though I think it may be a boon to the ETF industry.”
John DeGoey, associate portfolio manager at Burgeonvest Bick Securities Ltd. in Toronto disagrees. “The real poop hitting the fan will be two years from today on July 15, 2016 when there will be mandatory full disclosure of product costs and advisory costs. That in my opinion will be transformational,” he said. “I wouldn’t be surprised if more than one quarter of clients were sufficiently disturbed by what they see that they will be inclined to move their accounts. I think 25 per cent will pick up their marbles and go somewhere else — some of them will switch advisers and some will become do-it-yourselfers.”
By 2016, statements will be required to break down all fees and expenses paid, including trailing commissions from mutual funds that advisers get. On the performance side, investors will see how well their investments have performed in dollar terms since they started to invest and their percentage rate of return over several time periods.
As of Tuesday, when consumers buy a mutual fund, they will receive a pre-trade disclosure of all charges paid or potentially payable when buying or selling the fund; this includes an explanation of deferred sales charges, trailing commissions, MERS and any other costs.