Hey there, time traveller! This article was published 14/11/2014 (2370 days ago), so information in it may no longer be current.
Despite markets generally working pretty well, there's a sense among many investors that the playing field isn't level.
The feeling of unfairness is often directed at one of the most widely held investments: mutual funds. A lot of criticism regards management fees. Many question whether management is worth the cost of the fees -- usually about one to three per cent of assets a year.
And there's lots of empirical evidence to suggest active management doesn't add value.
Of equal criticism is that, embedded in those annual fees on mutual funds, are essentially hidden commissions investors pay to advisers who recommend the funds. This is basically a fee within the fee that's paid to compensate for advice and ongoing help.
Critics allege because we're mostly unaware of its existence, we're uncertain of the value of the advice we didn't even know we're paying for in the first place.
Yet a recent survey by PricewaterhouseCoopers (PwC) suggests Canadians aren't all that upset about their investments and the advice they're receiving.
Instead, it paints a picture showing investors understand more about the cost of investing than industry critics give them credit for -- and that overall they're quite happy with the products and services they're receiving.
PwC's national asset management leader, Raj Kothari, was the driving force behind the survey and related report called Truth in Transparency: Findings from PwC's Mutual Fund Investor Survey.
He said the survey helps add another "important voice" to the debate in Canada about whether certain forms of commissions should be banned as they have been in other jurisdictions such as Australia and the U.K.
This important voice belongs to investors.
"Numerous questions have been raised about advice and about commissions," he says. "But no one has asked how investors really feel about the subject."
Interviewing 1,200 people across Canada from diverse backgrounds, the survey found that of the 68 per cent of Canadians who had an adviser, 96 per cent were satisfied with the advice they received.
But Kothari said the results showed something even more telling: Investors understand what they're paying for.
"What was very surprising to me was the level of understanding that people had about the fees and compensation that was paid to advisers -- especially in light of what we read in the press."
The survey found 77 per cent said they have a good grasp of how their advisers were compensated.
But improvements could be made by giving clients more options in how they pay for advice.
Kothari pointed to this as a possible sore spot because almost four in 10 don't understand the different options to pay for advice, such as the difference between paying an upfront sales commission and a trailing commission with a deferred sales charge.
Yet, he adds investor understanding of fees should only improve as new regulations -- under CRM2 (Client-Relationship Model 2) -- come into force. As of last summer, for example, financial institutions and fund companies must disclose all fees associated with an investment at the time of its purchase. Next year, further regulations will require firms to provide more disclosure about funds with deferred sales charges, as well as expanded reporting on statements that display both the current value of an investment and its original cost.
By 2016, new rules will require companies to provide annual statements of all incurred charges, including trailer fees, and a statement with annualized return of each investment since purchase.
But investor advocates including FAIR Canada have been pushing for regulation to go even further.
They want Canada to go the same way as the U.K. and Australia by outright banning commissions such as trailer fees, said Neil Gross, FAIR's executive director.
Yet this, too, is an imperfect measure because it will eliminate a form of compensation well-suited for investors who make less than $250,000, Kothari says.
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"There is something to be said for the methodologies whereby advice can be made available to small investors and those just starting out."
If trailer fees are eliminated, he argues the small investors will have to either pay a fee for advice up front, which they are unlikely to want to do. Or they will go to their financial institution to buy its proprietary funds through an adviser/planner who is paid a salary by the bank or credit union. In this case, the advice is 'free,' but this is also problematic because, for instance, investors can only choose from the bank's lineup of funds.
All this means banning trailer commissions is probably overkill, Kothari said, and the current and pending regulations should provide investors with enough clarity about fees to make informed decisions with their money.
"I'm an optimistic guy."
Looking for an adviser?
Neil Gross, head of the Canadian Foundation for the Advancement of Investor Rights (FAIR Canada), offers his tips for potential investors.
1. Don't assume an adviser has to act in your best interest: You'd think regulations would compel a mutual fund adviser or stock broker to do what's best for you, but this is still a work in progress. Current rules state advisers must only meet a suitability standard based on your goals and risk tolerance when they recommend an investment to you," but they don't have to be optimal investments," meaning the adviser is free to recommend a higher-commission product and is not obligated to tell the client about a cheaper option. Gross says a best-interest standard, such as those used by money managers with discretionary authority over high-net-worth clients' money, would eliminate that conflict of interest.
2. Advisers are salespeople: Most advisers get paid commissions for selling a fund, which is paid by the fund company, and indirectly by the investor. But the cost is often not transparent.
3. Options can be limited: Most advisers are licensed to sell only certain products. "As a result, clients often are not given a full range of choices that might meet their needs," Gross says. "It's important for investors to understand this, and find out about alternatives --especially since today there are low cost investment options such as ETFs (exchange traded funds)."
4. 'Adviser' in name only: In Canada, anyone can call themselves a financial adviser or financial planner. No government agency regulates these designations. Regulation instead applies to members of the industry selling securities and other similar products.
5. Don't be afraid to ask: Advisers should clarify how an investment works, its risks, its costs, how and how much they're paid for selling it. "An adviser should be able to explain everything in a way that the client can understand," Gross says. "If you find that you don't understand what your adviser is saying, don't just assume you'll never be able to comprehend this stuff. Try asking another adviser."