PIECE OF MIND

NEXTTIMEYOU’REATABIGLUNCH, CHECKOUTWHO SCRIMPSONTHETIPONTHEGROUPBILL. THAT’SA PERSONWHOHATESFEES, EXPECTEDOROTHERWISE. BUTTHETRUTHISTHATWEWOULDALLPROBABLYPREFER TOGETFREESERVICE, WHETHERATARESTAURANT, ABANKORFROMOURINVESTMENTMANAGER.

Advocates are hoping new advisor fee disclosure rules will sharpen investors’ focus, but we should all remember you get what you pay for.

The lengths some of us go to be willfully oblivious of what we pay when it comes to the latter, however, has long had investor advocates up in arms — and for good reason. There is simply no excuse for not asking what fees and commissions advisors earn when they sell you mutual funds or tell you to invest in certain products. But it’s also true that the industry has gone to great lengths to avoid disclosing such information.

Check out the last investment statement you received. It will show how much of your portfolio is in registered and nonregistered accounts as well as what portion in each is devoted to stocks, bonds, mutual funds, exchange-traded funds and [shudder] guaranteed investment certificates. It will also show you how your portfolio has increased over the past quarter. If you’re lucky, it may even have a year-over-year comparison. But it won’t tell you how much your portfolio has actually grown because of your advisor’s expertise and it won’t reveal just how much money he or she earned to make your return and how that affected your results

Into this breach comes a whole slew of initiatives catchily called Client Relationship Model [ CRM] and, more recently, Client Relationship Model - Phase 2, a set of rules and regulations that will force advisors to provide greater information about the investing process, including more disclosure and information about conflicts, fees, advisor compensation and portfolio performance. The big change in all of that is fee disclosures. Many Canadians are not aware that they are paying embedded fees or trailer fees that are paid by mutual fund companies to the advisors who sell their products, which are then fed through to clients. “For the average investor, investing is complicated and they can’t really understand a lot of it, which is why they turn to a professional to advise them,” says Neil Gross, an experienced securities lawyer who has been executive director of FAIR Canada (Canadian Foundation for Advancement of Investor Rights) since its formation in 2008. “They don’t ask a lot a questions about how they get paid and how much because that’s the nature of how they wind up in the relationship and there’s a great deal of trust.”

That trust has come under heavy fire from advocates who believe some advisors and the mutual fund companies they work for may be gouging the public without telling them. There’s a management expense ratio ( MER) that covers operating expenses and GST/HST; a one-time sales commission or load, whether front-ended or back-ended, paid to an advisor’s firm for selling a mutual fund to investors (there are also no-load funds); and short-term trading fees. According to a Morningstar report in 2013, the average equity mutual fund has an MER of 2.42%, but there is a wide variance depending on the type of fund and the firm. Nevertheless, Morningstar gave the Canadian industry an F for its fees and expenses.

The question investors will have to ask, however, is whether they are getting good value for the money and the answer is not going to be an easy one. For one thing, some advisors are simply more proactive than others or provide more services. A higher fee may equate to a better service — or not. “The criticisms of the industry by the advocates tend to focus very heavily on the fees and the charges, but there is a corresponding value,” says Ian Russell, CEO and president of the Investment Industry Association