New rules that go into effect today should begin make it easier for consumers to understand the fees that are levied when they buy a mutual fund, bond or other investment product, but a full disclosure of fees in dollar figures won’t happen until 2016.
The Client Relationship Model rules apply to advisers at banks, credit unions, investment counselling firms and any other business that is regulated by the Canadian Securities Authorities.
The rules, being phased in over four stages ending in 2016, are meant to make fees for financial products more transparent for consumers.
'There’s people who are still not going to read their statement and they’re not going to notice a thing and the other people who are looking at it and still not knowing what it all means' - personal finance expert Preet Banerjee
"The changes are going to be phased in over the next three years. This year, there’s actually not a lot of changes," says Preet Banerjee, a personal finance expert and author of Stop Over-Thinking Your Money.
Financial advisers are already following rules introduced in 2013 which involve walking new clients through a disclosure document that describes the kinds of products and services the adviser offers, how their accounts operate and how they assess whether an investment is suitable.
Change in bond, pretrade disclosure
The rules taking effect July 15 also mandate pretrade disclosure – outlining the charges involved with the sale of each product, including trading fees, trailer fees, adviser fees and the management expense ratio. That is followed by a written post-trade confirmation listing the same fees.
"The big change is with fixed income, so when you buy a bond you’re going to get the yield showing up on your trade confirmation. You’re also going to see if there are any mark-ups or mark-downs for the price you get for the bond," Banerjee said in an interview with CBC’s The Lang & O’Leary Exchange.
But advisers don’t have to give you the dollar amount yet – that doesn’t happen until 2016.
At that point, your adviser will send quarterly and annual reports with all the individual charges in dollar terms as opposed to percentage terms, Banerjee said.
He thinks that’s when Canadians will be "shocked" at how much they pay for investment advice.
Full extent of fees will be a shock
"In 2016, when they see that on an average $50,000 account there’s maybe $1,000 in fees they’re going to say, ‘hey wait a second – I’m paying you $1,000 and I’m see you once a year, let’s look at the cost-benefit analysis,’" he said.
While studies have shown how poorly many mutual funds do each year by comparison with industry benchmarks, most consumers don’t pay attention to those standards, he added.
"It’s a very muddy conversation to have because these investment products include, not only the cost of the product, it’s also the cost of the advice," Banerjee said.
"And the benchmarks is another thing that should be discussed. It’s not mandatory to provide a benchmark, but advisers will have to have a discussion of what is a benchmark and how do you use that to determine how well your strategy is performing."