Is the industry ready for total cost reporting?

Canada’s wealth industry is poised to step further into a new regime of transparency next month as regulators introduce new guidance around total cost reporting.

That guidance will come following joint proposals by the Canadian Securities Administrators (CSA) and the Canadian Council of Insurance Regulators (CCIR) on how to improve total cost reporting for investment funds and segregated funds.

Those proposals, published nearly a year ago, included periodic reporting to clients to show ongoing costs of seg funds and investment funds.

For securities investors, the regulators said account statements would be enhanced to include fund expense ratios for each investment fund owned by the client, expressed as a percentage, while annual cost and compensation reports would include total dollar cost of owning investment funds over the previous year. Under the proposed changes, segregated fund holders would see a new annual report that covers that information.

“I haven't seen details of what might actually be implemented. But conceptually, we know what this will be in terms of pulling out all of the embedded costs,” says Dan Hallett, vice president, research and principal at Highview Financial Group (pictured above, left).

Michael Konopaski, CFO at Designed Securities, recalls that the CSA initially announced the proposal as a response to concerns identified with respect to current cost disclosure and product performance reporting requirements. It referred to consultations with investor advocates and market participants, and said it drew upon behavioural insights as well as results of testing sample documents with investors.

“Proposals like total cost reporting usually start with a research question, followed by data collection, data analysis, interpretation, findings, discussion, and so forth, but the methodology used by the CSA to launch the project is vague,” Konopaski (above, right) says.

Aside from being a big change for clients, Hallett anticipates that the increased cost transparency will require a significant adjustment for the vast majority of dealers and purveyors of financial advice across Canada.

“Once we have a really clear set of requirements and deadlines, they'll get this done,” he says. “Are they ready, if they had to flip the switch today? Probably not, because they haven't been required to do this ever before.”

At Designed, Konopaski says there will be little change in how the firm interacts with advisors and clients, but it will be different for their dealer competitors “who seem to be more focused on becoming fund companies or already have proprietary investment funds".

“We anticipate they will find it harder to promote in-house products with this additional layer,” Konopaski says. “They will need to be clearer on why their products are the most suitable for clients in an era of increasing transparency on costs.”

For larger firms with complex infrastructure, total cost disclosure may prove to be a tough undertaking, though that challenge could be offset by the level of resources they can devote to it. Beyond size, Hallett believes the impact felt by firms from implementation would depend on the type of platform and registration.

“Firms that are registered in the category of portfolio manager, but that deal directly with the end client, would generally be set up with an infrastructure that is more transparent on costs than dealer firms,” he says. “Similarly, there would be boutique firms, regardless of their registration, that would be set up to really embrace a fiduciary-type standard of care, and so likely have been providing that kind of transparency for some time already.”

“There won’t be much change for Designed Securities, but there will be significant work required by platform providers,” Konopaski says. “It’s a massive project.”

Against a backdrop of industry calls for reduced regulatory burden in recent years, many firms may be tempted to treat total cost reporting as yet another tick-the-box exercise. For Hallett, the hope is that the prescribed form by regulators and the ones put out by the industry will go beyond incorporating additional details, and be designed to inform clients.

“That was a challenge with the CRM2 reports. While they had all of the information there that was prescribed by the new requirement at the time, I think a lot of people still found them a little bit hard to follow,” Hallett says. “The new disclosure may not be as user-friendly as it should be, because that’s how a lot of these initiatives start.”

Konopaski expects that the proposed changes will be good for the industry, but doesn’t expect they will change the way clients perceive value from their advisors. While Hallett acknowledges the total cost reporting rules are an important step forward, he argues there’s more work to be done.

“You want an advisor that builds a business with the idea that they want to do right by their clients and treat them the way that they would want to be treated if they were sitting if the tables were turned … that that would be a huge leap forward for me,” he says. “There's certainly no shortage of firms and people that think that way. But we really don't have an industry that does.”