New investment disclosure rules a good first step

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investment disclosure rules
Fee disclosure and performance reporting disclosure rules start this year.

The rules of investing are changing. Finally.

The investment statement you receive from your investment dealer is now required to be more transparent.

Two new pieces of valuable information will be provided.

First, the dollar amount of fees you pay for receiving financial advice will be shown. For some that will be a surprise.

Past investor surveys have asked clients questions about fees. Some clients responded that they were not aware any fees were being paid.

If you have had candid conversations with your financial advisor, you will be aware of the fees you pay. Many advisors have adopted a “fee-for-service” method of remuneration where fees are disclosed.

Unfortunately, many advisors have been reluctant to disclose fees and in some cases, have attempted to conceal the reality that fees are paid for receiving advice. When their clients suddenly discover they have been paying for advice, some clients will react strongly.

The new disclosure rules start this year. For many, your next investment statement will be arriving soon.

If you have been receiving little or no valuable financial advice, you have every reason to be concerned. 

The anticipated day of reckoning has been considered by some advisors, who have made changes to the way they do business. Some started to be more open about fees which is admirable. Better late than never.

Unfortunately, others have changed their registration category. They have moved from an area where new disclosure rules were fast approaching, to a category of registration that ignores the obligation of disclosure.

The fact that this is even possible means those responsible for regulating all the different categories of advisor registration need to collectively co-ordinate their efforts at investor protection.

The second part of these new disclosure requirements is performance reporting.

The theory is that you can evaluate your advisor based on the fees paid, and the results of that advice as measured by your rate of return.

There is a problem here.

Hopefully reviewing short-term performance results will not encourage clients and their advisors to react to normal market volatility, by buying and selling investments based on normal market fluctuations.

Investing is better done as a long-term endeavor and cannot be meaningfully measured by short-term results. That being said, requiring performance numbers to be shown is an improvement.

Both these new initiatives, fee disclosure and performance return disclosure, are a good step forward. Unfortunately, the disclose requirements fall short.

Some fees are not reported. Specifically, the underling costs of owning mutual funds. The Management Expense Ratio often referred to as the MER will not be reported.

A client will see the fee disclosure on what is paid to the investment advisor and the investment dealer, but not fees paid to the mutual fund company. Clients who receive a fee disclosure will automatically think this is the total investment fee.

It seems extremely strange that some fees are disclosed and others are not. In my opinion, and it is only my personal guess, is that the large mutual fund companies had some influence at being able to continue to hide their fees.

If the regulators want fee disclosure, then that is what they should have implemented. Full fee disclosure.

The idea of fee disclosure is sound. The manner in which it has been implemented is weak.