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Fund regulator weighs further transparency on investing costs

Under the second phase of the client relationship model – the Mutual Fund Dealers Association will require wealth management companies to provide each investor with an annual summary of charges paid by the investor and compensation received by the firm.


Canada's mutual fund regulator is looking into whether fees charged by fund companies – such as management fees – should be included in regulatory changes that will provide investors with greater transparency concerning the cost of financial advice and of their investments.

The changes, known as the second phase of the client relationship model (CRM2), are slated for July 16, 2016, and currently do not include the costs imposed by mutual fund managers.

The focus of CRM2 is to provide disclosure of the cost of advice rather than the overall cost of an investment product. Currently – under CRM2 rules – the Mutual Fund Dealers Association will require wealth management companies to provide each investor with an annual summary of charges paid by the investor and compensation received by the firm.

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Although the changes have yet to come into effect, the MFDA received feedback from financial advisers, investment dealers, fund companies and investor advocates asking to consider expanding the reporting rules to require disclosure of the other costs of owning investment funds that are not paid to the investment firm – or the financial adviser – such as management fees, fund operating costs, redemption fees and short-term trading fees.

"The industry is now asking should clients get more information and not just how much they are paying the investment firm, but really how much is it costing them to invest with the firm, both in terms with how much they are paying the dealer for distribution as well as for product manufacturing," Karen McGuinness, senior vice-president of member regulation and compliance for the MFDA, said.

The MFDA is seeking industry comments to find out what types of products would be subject to expanded disclosure, how the reporting would be communicated to clients and what the impact would be to the industry over all.

Operationally, reporting of these additional fees could prove difficult for the industry to implement, said Rebecca Cowdery, a securities lawyer and partner with Borden Ladner Gervais LLP in Toronto. "I think this expanded disclosure is a huge missing piece of what investors need to know about the full amount of the cost of investing, but it would certainly include a fair amount of transition and a lot of work on the investment dealers' part to report it accurately," Ms. Cowdery said. "Clients could be investing in five different mutual funds from five different companies and the dealers would have to have the reporting systems to calculate those figures."

Neil Gross, executive director of investor advocacy group FAIR Canada, said adding more fees to the reporting rules could be confusing and shouldn't be used as a reason to delay other key investor protection initiatives.

"While disclosure of these costs would allow the investor to know the total cost of owning the fund, it isn't clear whether investor understanding of advice costs may be compromised in the process. It would have to be tested with investors," Mr. Gross said. "The impetus for improving disclosure should be driven by what's in investors' best interests. While disclosure is important, other reforms such as banning third-party embedded commissions are what's really needed."

The MFDA is asking the industry to provide feedback until March 10, 2016, and will be sharing the results of the consultation with other securities regulators.

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About the Author
Globe Investor Reporter

Clare O’Hara is a reporter at The Globe and Mail. Prior to that, Clare spent eight years as a staff writer at Investment Executive, a national newspaper for financial service industry professionals. More


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