Most people who invest their money with an investment adviser know how much they pay for the service. All costs are required to be disclosed for things such as mutual funds and purchases of shares.
However, not all investors pay attention or take the time to explore these costs. There's only so much the investment industry can do about those people. But I strongly encourage you to be a nosy consumer and investor, and ask any and all questions of your adviser, to make sure you fully understand your situation.
As I've written in this column many times over the years, you need to be clear with your adviser about your expectations, the range of services to be provided, the frequency of contact and the costs. As in a marriage, the more things that are on the table and in the open, the more potential satisfaction in the relationship.
Though there is full disclosure required of costs paid by investors, there remains the opportunity to obscure things. For example, when a person purchases a bond from either a discount or a full-service broker, there is no disclosure of the price markup assessed by the dealer on that bond.
The investor is told the current yield and yield to maturity, which are the most important aspects of the decision. However, the investor seldom knows the actual profit made by the investment dealer.
Mutual fund management fees and operating expenses are now disclosed as a percentage. This is a useful and meaningful disclosure and fairly simple for the investor to calculate the dollars involved in their particular situation. However, my observation is most people don't do that calculation.
The Investment Industry Regulatory Organization of Canada (IIROC) is going to change both those situations over the next few years. "Fuller" disclosure is going to become the order of the day, along with more stringent requirements for investment advisers to keep up to date with changes in their clients' situations, and be more diligent with regard to the suitability of investment recommendations.
New regulations requiring more disclosure and greater knowledge about new clients actually came into effect March 26, 2013. These rules will be fully effective March 26, 2014 for existing clients of investment advisers. Already in place are stringent rules on disclosure of conflicts, or potential conflicts, of interest between advisers, their employers and clients.
A document called a relationship disclosure is now required at the time of account opening, with a goal of providing clients with full information about their accounts and what they can expect from the relationship.
Within two years, all dealer compensation and investor costs will be required to be disclosed in dollar amounts, not just percentages.
Next on the horizon is the requirement for meaningful performance reporting. This is something my team and I have always provided, which has set us apart and been much appreciated by clients. It will be good to see this practice more widely adopted.
From my perspective, the single greatest improvement in this whole regime is the requirement for these documents to be in "plain language." If nothing else changed, understandable disclosure would be a huge step forward.
The next step, which I fear may be missing, is a serious attempt to focus disclosure on what is most relevant for each particular client relationship. An overwhelming amount of information being given to a client can be almost as uninforming as too little information if that larger amount cannot be understood and absorbed.
If you find yourself in that situation, remember you, as an investor, always have the right to ask any and all questions, and to receive an answer you understand.
The challenge for the adviser is explaining things in understandable terms is not always easy. But that's their problem, not yours. You keep asking questions until you have the information you need, or consider moving to an adviser you can understand.
David Christianson, BA, CFP, R.F.P., TEP, is a financial planner and adviser with Christianson Wealth Advisors, a vice-president with National Bank Financial Wealth Management, and author of the book Managing the Bull, A No-Nonsense Guide to Personal Finance.