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Fund Facts: an improvement for educating investors

Fund Facts: an improvement for educating investors

June 19, 2014

Investors are going to receive better mutual fund information before they make that fund purchase.

This is a welcome upgrade to the existing system. It will help millions of Canadians who own mutual funds and have them as their investment vehicle of choice.

The value of Canadian mutual funds is approaching $1 trillion. About half of all Registered Retirement Savings Plans and Registered Retirement Income Funds are invested in mutual funds.

In the past, the requirement was for investors to receive a simplified prospectus for each mutual fund they purchased. The simplified prospectus appeared to be anything but simple.

Many investors and advisors considered this to be a complicated document written by lawyers for lawyers. Most investors did not have the patience to attempt to read it and many who did found the information difficult to understand.

Now investment advisors must give investors a short Fund Facts summary of the mutual fund investment. The Fund Facts are simply written and easy to understand.

It will communicate what every investor wants to know. How does the fund invest, who is the manager and most importantly what the cost will be?

The cost of owning mutual funds has been the little dark secret of the investment business for decades. Now mutual fund fee information is more accessible instead of being hidden in the complex legal jargon section of the mutual fund prospectus.

The standardized Fund Facts have been listed on mutual fund company websites since the year 2011. As of June you must receive a copy of the Fund Facts within two days of purchasing that fund.

The ultimate goal is to get that document into your hands before you purchase the fund so you can understand the information before any purchasing decision is made. You might find it helpful to read the Fund Facts for all of the funds you own. Go online to the fund company website or ask your advisor to send you a copy.

Investment costs are broken down into two segments. First, there is the Management Expense Ratio often referred to as the MER. Second is the Trading Expense Ratio.

Trading costs are in addition to the management costs. That is important for you to know because it allows you to compare the costs of trading between different managers. Managers who trade more often than others will have higher trading costs.

In my opinion the single, biggest benefit that Fund Facts will have for you is the disclosure of investment fees. In a perfect world, all advisors would verbally communicate all fees to all investors. This will be the start of a healthy learning process for clients who have been unaware of the high cost of owning mutual funds.

Now that you see the cost, you will be able to make a value judgment about whether the fund and the financial advice for which you pay are worth the cost. Are you getting good value? Fees are one part of the equation. Financial planning and investment advice is the other part.

Virtually all areas of consumerism in Canada require buyers to know the price of what they purchase. That has not always been the case for those owning funds.

My prediction is that many conversations between an investor and adviser will be difficult as a result of this new level of disclosure.

Investors will want an answer to the obvious question about why mutual fund fees were not clearly explained in the past. The next question brought forward will be whether or not there was enough investment advice to justify the fees.

As difficult as those discussions will be, it will cause the financial services industry to adjust. Fees should be fair and transparent and advice should be worthwhile.

There has to be good value received by investors and the introduction of the Fund Facts disclosure of fees is a good start to improving the investment business.