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The Canadian Financial Advisor

CRM II Disclosure, low-cost “Robo Advisors”, and expensive mutual funds

Benjamin Felix

There is a shift poised to take place in the Canadian financial services industry. Currently, investors with assets between $5,000, and $150,000 tend to be served by commission based mutual fund salespeople and bank advisors selling expensive mutual funds with the promise of superior performance. There is a tremendous amount of evidence that these types of mutual funds harm investors while lining the pockets of investment companies and financial advisors.

Between 2014 and 2016, the Canadian Securities Administrators are implementing regulatory reform. The reforms are designed to create transparency, increase industry disclosure requirements, and provide more overall information to investors. Some key points from the reform schedule follow:

July 15th, 2014

  • Before a trade order is accepted, clients must be informed of all management fees, the cost of selling the investment in the future (if deferred sales charges apply), trailing commissions, front end loads, and the cost of changing investments.
  • Benchmarking must be explained to clients. This can be done by adding benchmarks to performance reports and explaining why they are relevant, or it can be done by explaining what a benchmark is and the firm’s view of using them in the Relationship Disclosure document.

July 15th, 2015

  • Dealers must start calculating and maintaining performance data using the money-weighted return method (Internal Rate of Return).
  • Dealers will be required to show the original cost of each security held in an account.

July 15th, 2016

  • It will be a requirement for clients to receive a statement showing all of the fees, commissions, and other charges that they have paid throughout the year in relation to their account.
  • All accounts must receive, at minimum, an annual performance report - these reports must include the money-weighted returns.

While all of this regulatory reform is occurring, there are low-cost, online investment management firms popping up around the country (nestwealth, wealthsimple, wealthbar). Firms like these have already taken a strong hold in the US, but are just now coming to Canada. They are targeting investors with assets between $5,000 and $150,000+. They have account minimums ranging from $5 -$25,000, and their fees are significantly lower than the fees that the average investor would otherwise be paying at these asset levels. The online firms are also doing something that commission based mutual fund advisors can’t afford to do for small accounts – they are building well diversified, low-cost portfolios using Exchange Traded Funds. To top all of that off, the online firms claim that they will also offer some level of financial advice.

When July 15th 2016 arrives, we will be in an environment where investors are explicitly aware of how much they are paying for financial advice, they will have had benchmarking explained to them, and they will be shown how their portfolio has performed against a relevant benchmark throughout the year. If it happens (as it should) that the smaller investors see that they are paying a lot of money for mediocre advice and poor relative performance, a low-cost, index-based alternative will be available to them, regardless of their portfolio size.