For years the securities industry and the mutual fund world have been opaque in disclosing what investors selling the funds are being paid. This is the time for the public to say what they want from their advisor.
We are coming to a new level of disclosure in the investment world; one where the fees will be known. There are three components that you will begin to see this year: pre-trade disclosure of charges, charges set out in trade confirmation on debt securities and expanded relationship disclosure (benchmarks).
For years, the securities industry and the mutual fund world in particular have been opaque in its disclosure of what the investment dealers are being paid. Commissions are often not disclosed and mutual fund fees, although published in the prospectus, are not often discussed.
Penalized if you sell
It should be noted that one of the reasons this new disclosure regime is being launched is deferred sales charge fees have fallen out of favour. A deferred sales charge (DSC) is a back-end fee that is charged to a mutual fund investor if they redeem their investment before a set time, usually five or six years. The purpose is to discourage the early redemption or sale of the investment. Typically the DSC starts at five or six per cent in year one of the investment and declines every year until it reaches zero per cent.
Trailer fees – the fees a mutual fund manager pays the person selling the fund to investors – are paid the salesperson on a monthly basis. The fee doesn’t come out of your pocket but it is a cost that comes out of the fund, so you should be aware of it. For now, the insurance world is regulated by a different body than the securities or mutual fund dealers, so they may not be participating in this type of mandatory disclosure.
The bond market is another good example of opacity when it comes to costs because the fees come by way of the difference in price between the bond desk price and what you will pay or receive. Currently, if your broker can get a bond at $100 and they want to charge you one per cent, your price will be $101 and that is the price you will see on your confirmation slip, along with your yield to maturity.
The total amount of any commission charged to the client by the registered dealer will be included on the trade confirmation in dollars and cents. There has always been complaints about the lack of transparency in the bond market with regard to prices, but it isn’t likely to change until the bonds start trading on an exchange and not over the phone. At least now you will know the cost to buy or sell the bond.
Benchmarks – such as the S&P/TSX Compound Index or the S&P 500 Index – can be very useful tools when you look at your portfolio performance; they give you an idea of what a good earnings performance has been in the recent market, so that you can make a judgment about whether your investment is doing well or badly The disclosure of which benchmarks will be used for comparison will now be detailed in your relationship disclosure document. You will receive this document from your advisor and it sets out the some of the expectations and parameters of the relationship.
Good advisors have always been up front about the fees that they charge, as well as what can be expected from the clients’ point of view. The advisor that is getting paid for executing an order should be doing more than providing a purchasing service, such as providing advice about what to buy and when to sell.
Are you well-served?
What is it that is deemed to be valuable is between you and your advisor? Maybe you like the monthly or quarterly updates that you get because they keep you well informed about markets in general. Maybe your advisor spends quality time with you and really knows what you need because you have such a great relationship. There could be many reasons that you chose your advisor, but cost should never be one of them in this market, unless you are getting nothing more than order execution.
This is a perfect opportunity for you to express what it is that you want and expect from your advisor. You should be prepared to hear some expectations of you as well, such as returning phone calls and getting documents to them in a timely manner. Having all the expectations on the table should make for a greater long-term relationship on both sides.
Jennifer Snyder is a portfolio manager with Harbourfront Wealth Management, at 177 St Mary’s Road, Winnipeg, a member CIPF.