Time for investors to ask advisers the tough questions

As investors should already know, the Canadian Securities Administrators (CSA) in 2013 introduced a new set of rules requiring an array of changes in the way that investment advisers communicate and report to their clients.

The goal of these rules, dubbed CRM2, was that by July 2016, investors would have more information available to them, in an easily digestible format, that would allow them to make more informed decisions regarding the value received for the aggregate compensation paid to their advisers and the institutions they work for.

There has been no shortage of discussion regarding whether the CSA has gone too far (or not far enough) with its new rules, but no one can deny that Canadians are currently subjected to the highest advisory and management fees in the world.

These fees are often embedded into the financial products investors are sold, thereby exacerbating the problem of high costs through obfuscation.

We recently learned that the key component of CRM2 — the requirement that clients receive detailed information regarding the performance of their investments along with a tally of all the costs involved along the way — has been delayed by six months.

For independent firms that have been CRM2-compliant for years — since CRM2 does nothing more than codify the requirement to supply information that common sense would require if both sides were dealing on a more even footing — the delay is unwelcome.

It allows for another six months where independents must operate at a competitive disadvantage to the large investment firms, which appear to represent a much better value until the aggregate fees and performance metrics are clearly shown and easily accessible.

Since the vast majority of investors in Canada deal with large investment dealers that seem intent on putting off a complete and straightforward portrayal of the performance and cost of their clients’ investments for as long as possible, wouldn’t it be useful if you could know now what is really going on?

To some extent, you can. Since even the most recalcitrant advisers and institutions aren’t allowed to knowingly mislead you, you can ask three simple questions, the answers to which will shed light on your current situation.

What is the performance of my portfolio, net of all fees, for one, three and five years, as well as since inception compared to a reasonable benchmark over the same period?

A simple spreadsheet with a line graph showing your portfolio plotted against a benchmark (usually representing a mix of stocks and bonds) over these periods will reveal most of what you need to know with even a cursory reading.

Most portfolios will underperform their benchmarks over time, not because the advisers are weak, but because any value added through good advice is often extinguished by the high fees and costs associated with it.

If I were to replace actively managed funds with exchangetraded funds, would I be subject to any redemption fees, and would my historical performance have been any different?

This question is designed to kill two birds with one stone. First, in most cases, cheap ETFs provide investors with the same risk profile and returns as mutual funds, but at a fraction of the cost. Simply knowing how an all-ETF portfolio would have performed versus the one that you currently have will tell you a lot about the cost/value equation.

The second part of the question will address whether you are invested in mutual funds that pay your adviser large upfront commissions in exchange for locking you up for years, subject to a high redemption fee should you sell before the expiry of the lock-up periods.

What fees do you charge me, expressed in dollars and as a percentage of my portfolio, and what commissions and/or trailer fees do you collect from third parties, expressed in the same terms?

Assuming you can get an answer to this simple question (the answer is often “we don’t keep that information”), you might be amazed to find that you are paying your adviser for advice while he/she is also getting paid by the funds to which the portfolio is deployed, or the issuers that launch products that find their way into your portfolio.

The latter adds significant cost to you (by way of lower net returns), and also introduces serious potential conflicts of interest that your adviser should be required to identify and discuss to your satisfaction.

It’s not easy asking your adviser for this information,

What is the performance of my portfolio, net of all fees?

since there is often a significant power imbalance between them and their clients that allows certain advisers to effectively intimidate clients into being and staying ignorant.

Nevertheless, you must overcome your trepidation. This is your money and your financial well-being at stake, so you owe it to yourself to know.

Many advisers will actually want to have this conversation, since it gives them the opportunity to explain to you how their services are of value to you over time.

A final word about adviser fees. Most advisers in Canada work off what is called a “grid,” representing the split of the fees you pay between the institution they work for and themselves. The most successful advisers at the largest institutions receive 50% of the total fees — most receive far less.

When you do find out what you’re really paying your adviser, remember that, at most, only half of those fees are going into his or her pocket, while the rest is going to the house. This doesn’t ease the pain to your pocketbook, but should reduce any resentment directed at your adviser.

The vast majority of advisers are honest, hard-working and not filthy rich. In the end, it’s the system against which you should direct your anger, not your adviser.