Industry strives to bring uniform approach to cost and performance reporting

By Susan Yellin | April 04 2015 10:00AM

Taking a cue from its successful Point of Sale “Fund Facts” documents, the mutual fund industry in Canada is striving to bring consistency to cost and performance reporting soon to be required under CRM2. But will it be enough?At the Investment Funds Institute of Canada (IFIC), six committees from 57 companies, totalling 135 people, have been working for the better part of a year discussing and pulling together uniform definitions, benchmarks, statements and investor language that IFIC can share and be used throughout the industry.

CRM2 regulations, which are being phased in over three years, introduce new requirements for reporting to clients about the costs and performance of their mutual fund investments and the content of their accounts. The first phase went into effect July 15, 2014, and when the final phase kicks in beginning July 15, 2016, firms must provide an annual report on all charges and other compensation as to the amount dealers are paid for the products and services they provide.

Main objective

The main objective of the plan is to produce clear and transparent information for investors and encourage more meaningful discussions between advisors and clients. In the end, the hope is that investors will become more knowledgeable about their accounts and the fees they are charged.

At a day-long operations seminar in November, IFIC dealers outlined a series of CRM2 issues, discussing the various and sundry ways different dealers could put together the statements and other information. Even some of the participants noted that such diversity among dealers could easily confuse investors.

But IFIC president and CEO Joanne De Laurentiis said even before then, the industry realized it had to come up with a more uniform model.

Consistency and clarity

“It’s precisely that. There are so many ways to do [those things] that we thought we would create ones that would bring consistency to the table,” said De Laurentiis. “We have been going through the requirements and trying to find consistency and clarity – one approach rather than a variety of approaches.”

For example, there have been a number of suggestions for what should go into the cost and or performance statements. CRM2 rules provide guidance on what should be in those statements but they can be designed in various ways. So an IFIC committee has determined that it would be of benefit for all investors if the industry created standard statements.

However, De Laurentiis noted, while the response was “enthusiastic” from members, it is up to individual dealers to determine if they want to use them.

IFIC also came up with a benchmark takeaway for its members and advisors, with easy-to-understand definitions on benchmarks for investors. It includes such benchmark examples as market indices, as well as a quick way for investors to compare their results with the benchmarks.

The Investment Industry Association of Canada (IIAC) has also prepared a number of articles for its members’ use. For example, it has outlined potential hotspots coming up this year and provides a regular newsletter for its members. As well, IIAC recently developed a document for its members that will help firms that would have had to report on an immaterial amount of off-book client positions.

folda_goshkaAll of these materials and backgrounders point to the extremely high profile on compliance and especially CRM2, for those involved in selling mutual funds especially in the last year. During this time there has been a “tremendous acceleration” by industry members to determine how best to comply with the new regulations and translate them into meaningful discussions with clients, says Goshka Folda, senior managing director at Toronto-based Investor Economics.

Dealers are trying to interpret the spirit of the principles-based regulations – to educate clients – and put them into practice, says Folda.

Industry challenge

“Right now the industry challenge is to figure out exactly what to do because they are still trying to translate the CRM2 concepts and make them into a real, living operation that can be communicated. [They] must not only fulfil the letter of the law but also the spirit of the law to really educate investors in such a way that investors will, hopefully, better understand.”

This is especially crucial when it comes to compensation disclosure, says Guy Armstrong, senior consultant and managing director at Investor Economics. The reason for some of the confusion is that regulators have not been prescriptive in their regulations, leaving it to the dealers themselves – or the industry – to determine how best to present the information.

But whether clearer documentation will make investors more knowledgeable is not known – nor is that the aim of regulators, suggests Armstrong.

“I think the securities regulators want dealers to have more open dialogue with their clients about how they make their money, about how they are paid, those sorts of things,” said Armstrong. “And I think to that end, the legislation is already proving successful to some extent.”

He says most advisors – from online to full-service brokerages, financial advisor firms, mutual fund dealers and even those in the insurance industry – are being proactive. “As a result of that, I think the intended legislation is already having the desired effect. How regulators will ultimately determine whether that’s good enough – I don’t know.”