Starting in mid-July, reports to investors on their money-weighted performance will become the mandatory industry standard in Canada for retail brokers and dealers. So will an annual report of fees and commissions at the account level, as Canada enters a new era of performance disclosure and fee transparency for individual investors.
The reforms, embraced by all 13 provincial and territorial jurisdictions across Canada, are part of what's known as the regulators' Client Relationship Model, Phase 2, or CRM2. They promise to be an eye-opener for investors, both in terms of how much they're making -- or losing -- from their investment accounts, and how much their financial-services provider is collecting from them. Given the generally low awareness of fees in the Canadian retail market, there's bound to be some sticker shock among investors who have been previously clueless about costs.
Though there is a phase-in period, the key date is July 15. Any one-year reports to clients with starting dates from that date on will be subject to the new requirements. However, since client reporting is usually based on the calendar year, most investors probably won't receive the first of the enhanced reports until early 2017.
The required 12-month report on performance will calculate a personal rate of return for clients from the account's opening value to its closing value, factoring in the timing and amounts of deposits and withdrawals, and changes in market values.
Money-weighted returns will need to be reported for various standard-measurement periods, depending on how long the investor has held the account. The four standard periods are one, three, five and 10 years. Accounts that are less than 12 months old are exempted.
The new rules do not preclude financial-services providers from reporting time-weighted returns, as long as these returns are in addition to the money-weighted reporting. Also optional is the reporting of market benchmarks. As noted by the Investment Funds Institute of Canada (IFIC), the mutual-fund industry's trade group, benchmarks aren't relevant comparisons to the money-weighted returns of individual investors. That's because market benchmarks evaluate performance over time periods, and do not take into account an individual investor's deposits and withdrawals.
The new performance-reporting requirements will apply to all holdings held in client accounts. In instances when the financial advisor or other investment representative is unable to provide the book value of a security or holding, that holding can be excluded from the performance report.
The new reporting requirements won't resolve discrepancies that can occur between the book values reported in an investor's account and the adjusted cost base of the holding for tax purposes when the holding is disposed of at a capital gain or capital loss.
One complication that can arise is if the same security is held in two or more non-registered accounts. In calculating ACB, investors must consider all of their holdings of that security in all of their taxable accounts. In that scenario, there may be significant differences between the book cost calculated for individual account positions and the ACB calculated for tax purposes.
The other major requirement under this summer's CRM2 reforms is the report on charges and compensation. Also being phased in starting on July 15, this annual report will cover point-of-sale commissions, redemption and switching fees charged by mutual funds, account administration fees and embedded compensation such as trailer fees paid to financial intermediaries by fund managers.
The total fees charged will be reported in aggregate dollar amounts at the account level. Nor will there be a breakdown of how much is paid to the individual advisor and how much is retained by the firm.
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