Over the next few months, you’ll likely be hearing more about the new disclosure rules that went into effect on July 15, 2016.
Rob Carrick’s article in The Globe and Mail ("What new disclosure rules for advisory fees mean for investors") sheds some light on these new rules, known as CRM2. The article offers an excellent explanation of what investors can expect to see under the new regulations.
The new rules require the investment industry to provide more clarity for investors on the fees and compensation investment firms collect, and on investment performance.
As Carrick notes in his article, investors should be aware of three things that firms are not required to disclose under the new rules:
- You will not find out what your advisor makes.
- Investment fees are not included.
- There are nuances to the way your returns are calculated.
At MD, we are aware of these gaps in the minimum report-producing requirements.
That’s why we have decided to provide our clients with detailed information about the fees you pay—not because we are bound by regulatory rules, but because it is the right thing to do.
The new rules require firms to show only the amount of compensation that the firm receives from the fund company. They do not require disclosure of the amount that your advisor earns.
This lack of transparency could be an issue in the case of commission-based advisors. But because MD Advisors work on salary, not commission, they are not paid based on the products or services recommended.
The compensation figure we disclose at MD is not related to the advisor’s earnings, and there is no associated lack of transparency.
The new rules require financial firms to show only a portion of the investment cost that you pay.
This is the part that is paid to the investment dealer, and could be considered to represent the advice portion of recommending the fund, as well as the ongoing service, advice and reporting.
What does not need to be disclosed is the portion paid to the fund manager for managing the fund. It also does not include the administration, legal and operating expenses.
At MD, we are going beyond this minimum requirement and showing investors both sets of fees.
For more information about fees, watch What Is the Cost of Investing?, an MD Quick Clinic video. To learn about the positive impact of financial advice, read Quantifying the Value of Financial Advice.
The new rules require financial firms to show investors only their personal rate of return. But when it comes to returns, there are two common ways of calculating them.
The personal rate of return allows you to track your own investment performance against your goals and accounts for large inflows and outflows in your personal accounts. The other way allows you to track the performance of the investment itself against benchmarks.
At MD, we will make both sets of returns available to you.
MD’s new reports
We will continue to update you about MD’s new Investment Performance Report and Fees and Compensation Report, which we look forward to delivering in January 2017, after you receive your regular quarterly statements.If you have any questions about these topics or about your investments, please contact your MD Advisor.