Are mutual fund investors getting the protection they need?

An industry advocate talks to WP about the importance of risk disclosure for mutual fund investors

Are mutual fund investors getting the protection they need?

In the first of a special two part series, investor advocate Ken Kivenko explained why many investors do not know how much they’re paying for investment management. Here, in the second part, Kivenko discusses the importance of disclosure of risk for mutual fund investors.
"Recently, there has been an effort to better disclose trailer commissions; Fund Facts do disclose trailer commissions but only as a range of values, so the disclosure is empty.

Back in 2012 Joanne De Laurentiis, then head of the Investment Funds Institute of Canada, said investors could be misled because such costs exist for other products they own (such as life insurance) and are not disclosed. “This lack of consistency could cause investors to make financial decisions that are not in their best interests,” she said in a news release at the time.

Disclosure of risk is very important and investor advocates came up with some terrific ideas for revealing mutual fund risk. However, all were rejected by regulators in favour of a methodology developed by IFIC.

Investor advocates argue that risk disclosures are incomplete and will mislead investors.

And, if we do not experience a spike in market volatility within the next year, the volatility numbers will begin to fall and inevitably, so will risk ratings. So, what at first what looked like a sincere attempt by the regulators to improve mutual fund risk rating could potentially give investors lower risk ratings based on this rating system.

Until a few years ago, mutual fund prospectuses only had to be delivered two days after the investment decision had been made. It took 20 years of investor advocacy to make sure that fund information was delivered before or at the time of sale. Yet, it’s till permissible for ETF Facts to be delivered two days after purchase.

IFIC took particular exception to the pre-trade delivery requirement of point-of-sale disclosure, which requires that a trade can be only executed after the investor has received and affirmed that he or she has read the Fund Facts document.

“The industry has significant concerns about the pre-trade delivery requirement, both from a competitive standpoint (as such a requirement does not exist for ETFs and other mutual funds not subject to NI 81-102, and other competitive products) and from a compliance standpoint, given that it may not be feasible to provide the Fund Facts at the time an investor wishes to make a purchase (such as telephone orders or orders taken away from the dealer’s office),” IFIC wrote at the time.

“Such limitations on the ability to trade, and the resulting inconvenience and risk to investors of adverse price movements, are difficult, if not impossible, to cost. Since other competing products would not be subject to the same disadvantage, this could prove to be the most significant cost of the initiative over time.”

A 2011 OSC sweep of portfolio managers found that approximately 57% of the PMs reviewed were deficient in disclosure. The disclosure related issues included:

  • marketing materials that contained outdated information
  • no disclosure of the source of third party information (other than data from recognized financial and statistical reporting services)
  • inadequate or inconsistent disclosure in offering memoranda and other offering documents of non-prospectus qualified investment funds
  • inadequate, or lack of, performance return related disclosures

Marketing materials that do not contain adequate disclosure relating to a PM’s advisory activities, performance, services and product offerings may be misleading to investors, who place significant reliance on and may be influenced by these types of marketing materials.

Other disclosure related issues include, but are not limited to, poor account statements, use of industry jargon and legalese in investor communications, inadequate conflict-of-interest disclosure, misrepresentation disclosure when selling DSC funds, and unresponsive dealer "substantive response" letters to complainants.

All in all, those who claim the investment industry is keen on disclosure don't have a lot of supporting evidence."

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