Segregated funds need CRM2-like disclosure: Expert

Segregated funds need CRM2-like disclosure: Expert

Segregated funds need CRM2-like disclosure: Expert A recent discussion paper released by the Canadian Council of Insurance Regulators (CCIR) has raised questions around required disclosure for non-securities investments such as segregated funds and IVICs – and whether they should be subjected to the same as mutual funds.

The Investment Funds Institute of Canada (IFIC) flagged the issue in a written response to the paper, which was released in May.

“The paper notes that disclosure of charges and compensation is not required for investments that are not securities, such as IVICs, although the Canadian Securities Administrators (CSA) and the Mutual Fund Dealers Association (MFDA) encourage dealers to voluntarily disclose them as part of the new CRM2 regime that now applies to mutual funds and other securities,” states IFIC’s letter.

Harold Geller, associate at McBride Bond Christian LLP, says the lack of disclosure around insurance-wrapped investing products poses a glaring conflict of interest to consumers.

“Fundamentally, the consumer protections available for the sale of a securities product are far superior to that of an insurance product," he says. “The consumer goes to an advisor and they know nothing about the limitations, expectations, or the obligations associated with that advisor’s license. They say, ‘I have money to invest.’ The advisor, with a hammer in their hand, says, ‘Have I got the product for you!’ But the consumer doesn’t know the difference between a mutual fund, an IVIC or a seg fund.”

As well, he says, incentives still exist for advisors to push seg funds and IVICs, which could encourage them to sell even when it’s not an ideal solution for the client.

“The second issue is simply the fees and compensation. There are still insurance companies in Canada that give sales bonuses, which is not in the consumer’s interest,” he says. “As soon as you have these embedded compensation issues, some people – advisors – will be selling for themselves and not in the client’s best interest.”

He says that while new CRM2 disclosures for mutual funds aren’t perfect, similar disclosures should be required for insurance investments, so consumers can truly understand their investments’ performance and fee structures.

“The gaps that were identified in this paper are the completely different disclosure levels. I’m not a huge believer in what the rest of the financial industry is doing by means of disclosure, but if you read the materials given out by seg funds, I, as somebody who has specialized in this area for 15 years, have a lawyer’s education and grew up in finance, cannot make heads or tails often of the segregated disclosure,” he says.

“If you look at what is reported on, mutual funds are going to have to have the last three to six months. With IVICs, they can pick and choose. They can paint a pretty picture in order to get better sales,” he says.

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  • Bob White, CLU 2016-08-09 6:32:16 PM
    It is a must.

    My practice is from the insurance and estate planning background. When Manulife introduced the Guaranteed many moons ago, you had to become mutual fund licenced in order to offer them to clients Income funds, and that was a good idea, because the product offered linked funds, not proprietary product.

    Now we see advisors dropping the mutual fund licence to concentrate on seg funds because they do not have to do all the mind boggling administrative/rule based paper work and disclosure. As such, in my opinion there is less disclosure, and when you only offer one product type, and can not talk about the other, then the consumer will never be able to make a truly educated decision.

    Another example of this, but from the opposite direction is bank advisors not disclosing the value of seg funds, because they do not offer them, or even of greater concern, only offering housed product.

    So how is that for transparent investing.

    There needs to be a lot of change that should take place, the problem is that too many parties are looking through different port holes and no one sees it clearly. There needs to be BIG thinking, and it needs to be done with a significant representation from advisors, and in particular from those who have well rounded practices and are seasoned with client experience.

    Just my opinion, but a good one I think!


    Bob White, CLU
    Member of Advocis since 1977
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