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Dale Jackson

Your Personal Investor


As the final phase of new investment fee disclosure rules rolls out a new survey finds financial advisors believe the effort will wind up costing their clients even more.

The investment industry launched the Client Relationship Model, or CRM2, over a decade ago amid pressure from regulators and consumer advocates who wanted to address the fact that Canadians pay the highest investment fees in the developed world.

Fast-forward to the present and we still pay the highest fees in the developed world, but the effort created a mountain of new time-consuming requirements for advisors that include regular disclosure of investment performance, and communicating all advisor fees in dollar amounts (in addition to percentages).

According to a new survey from Natixis Global Asset Management, 70 percent of advisors say the new regulations will actually increase costs for investors and put some out of business. One in three advisors polled say they plan to sell or merge their business or leave the industry.

The most heartbreaking result is 32 per cent say they will drop smaller clients. Most fees are based on a percentage of assets under management, which leave low-net-worth individuals and millennials just starting to build their portfolios without qualified advice.

And according to another part of the survey, the gap between what clients expect and what is realistically possible highlights the need for qualified advice: Clients say they need average annual returns of 9.3 per cent above inflation to meet their retirement goals, while advisors say 4.8 per cent is more realistic, the report found.    

Most Canadians save for retirement through actively managed mutual funds, which typically charge 2.5 per cent of the amount invested annually. That means any return (if any) is reduced by about 2.5 per cent. For that fee, the client has access to professional management and personal advice on such things as strategy, risk management and tax efficiency.

High mutual fund fees have been pushing investors away from active management, and toward lower fee products like exchange traded funds. The annual fees of ETFs are normally a fraction of a per cent, but merely mimic a broader index such as the S&P 500. If the S&P 500 goes up or down, the ETF follows by the same amount minus the smaller fee.

According to the Natixis survey 71 per cent of advisors say clients have a false sense of security about the risks in passive investments like ETFs.

Still, 46 per cent of advisors say they will direct clients toward ETFs because many mutual fund portfolios are really “closet indexers,” meaning they also mimic their benchmark indexes.

In the end, CRM2 maintains high fees for the mutual fund industry and denies smaller investors qualified advice.

Dale Jackson is BNN's Personal Investor. Follow him on Twitter @DaleJacksonPI