The release of disclosure recommendations for segregated funds will see life insurance advisors going through much the same motions over the next while as their mutual fund counterparts did when cost and performance disclosure documentation, known as CRM2, came into effect for their industry.

MGAs, especially those with mutual fund dealerships, are gearing up for the changes, taking a page from their CRM2 folder by holding roadshows, outlining the recommendations and giving advice to advisors on how they can add to their value proposition.

In December, the Canadian Council of Insurance Regulators (CCIR) released its long-awaited paper on introducing full cost disclosure for segregated funds. The insurance regulators noted the gap between mutual fund and segregated fund information available to investors and called for greater transparency due to increased demands by investors as well as the release of CRM2 information for mutual funds.

“Consumers want to understand and be able to compare the products that are available to them,” said Patrick Déry, chair of the CCIR.

The position paper brings the two industries in line with each other. But some say it also went above and beyond what the mutual fund industry has regulated for its advisors.

Additional regulations

“They [the CCIR] have almost tipped the balance in favour of mutual funds now by imposing additional regulations on segregated funds that the mutual fund industry doesn’t have,” said Aly Damji, vice president, wealth management at HUB Financial/HUB Capital, who oversees mutual and segregated fund sales.

Mutual fund dealers had until mid-July of last year to send the reports on cost and performance to investors. Clients can now see how well their investments have performed in both dollar terms and the percentage rate of return over several time periods. As well, they can see in dollar amounts, the costs associated with their accounts through the management expense ratio (MER), showing how much the dealer firm has received.

With the CCIR paper, Damji said insurance regulators have not only broken down the MER to include the dealer’s compensation, they have gone further by breaking out operating costs and management fee costs by the manufacturer. “We don’t have that today in the mutual fund environment,” he said.

That may not be for long though. The Investment Funds Institute of Canada (IFIC) said almost a year ago that its members would like to discuss a plan for “extended cost disclosure” requirements (also known as CRM3) to deal with the full MER. Jan Dymond, vice president of public affairs at IFIC, said the Mutual Fund Dealers Association has now taken the lead on this project, which would outline the costs of the fund manager as well as the dealer. Still not available would be the advisor’s compensation because each firm is different in its compensation models, said Dymond.

There are no specifics on a timeline for CRM3, said Karen McGuinness, senior vice president, member regulation, compliance, at the MFDA. “This year, however, we do intend to take steps and work with other regulators to further the discussion on achieving full cost reporting,” she said.

Damji said he has concerns with the breakdown in the CCIR’s proposals on MERs, saying manufacturers might start to push products with lower MERs to attract clients, even though these products have lower guarantees. He specifically noted the “75-75” segregated funds, which have a 75 per cent maturity guarantee and a 75 per cent death benefit guarantee. These are newer contracts that have been in the marketplace for five or six years and are among the most popular contracts today because they have lower MERs, said Damji. The downside is that investors are also getting a much lower death benefit guarantee.

Segregated fund advisors will also need to start performing a needs assessment, a step many good advisors already accomplish, he said. As well, the industry itself will need to align the requirements for the delivery of updated Fund Facts, establish consistent risk classifications used for segregated funds, promote an equivalent standard of care for those dealing in segregated funds and in mutual funds and consider harmonizing or adopting the Know-Your-Product rules that currently apply to mutual funds.

Damji said that while the regulators’ intention to provide clients with more disclosure is good, he thinks too much information could cause uncertainty.

“Too much disclosure can cause more confusion for clients and I think that starts to water down what the regulators are trying to do by providing clients with information that they can take and act on – by providing too much information and burying the important information.”

But Eric Wachtel, national chief compliance officer with IDC Worldsource Insurance Network Inc. was able to get in on some of the CCIR discussions in his position as compliance chair, legislative affairs with the Canadian Association of Independent Life Brokerage Agencies (CAILBA).

While everyone basically knew that the insurance industry would have to follow mutual funds in terms of disclosure, groups like CAILBA wanted to make sure all costs were explained, said Wachtel.

“We felt strongly that if you are going to disclose fees that you need to disclose all of them. That’s probably a good reminder to the client who may buy a seg fund but then as time goes by may not remember the guarantees and the protections that are built within the seg fund.”

Many of those who work in the insurance industry are just fine with the new disclosure changes, which have been in the works for a few years.

“I definitely accept it,” said Christopher Dewdney at Dewdney & Co. “It’s welcomed on my part. I think it’s needed to create an equal playing field between mutual funds and segregated funds. I welcome the heightened disclosure.”

Dewdney said he already conducts a needs analysis when he recommends one kind of fund over another. Clients generally understand that the death benefit and maturity guarantees cost more because of the insurance wrapper. And because segregated funds are an insurance product, they bypass probate and the estate and may be eligible for creditor protection.

Depending on the type of fund and the dealer there is about a 50-basis point difference between a mutual fund and a segregated fund, he said. On a $1-million account, a 50-basis point difference is about $5,000 a year, going a long way to help those who can’t get traditional insurance coverage. “I think it’s the advisors having the due diligence conversations with their clients, explaining the pros and cons…so they can understand what it is you are recommending and ultimately, what it is that they are purchasing.”

As far as HUB is concerned, one of its benefits is that it has its own mutual fund dealership, so much of the infrastructure, training programs and personnel required for new segregated fund disclosure was looked after during the transition to CRM2, said Damji. More education will be required for its advisors to ensure they have the right tools and the right value proposition to explain the changes to clients. “We need to ensure that they are empowered to talk to their clients about why they are worth what their clients are paying, much like what happened in CRM2.”

HUB sent out a communication to all of its advisors when the CCIR paper came out and it will be a major topic of discussion at forums HUB is holding, particularly how advisors can position their business and get in front the changes. “The big point I want to stress as a sales force is to start talking to your clients today about fees and MERs and costs rather than when it becomes mandated and clients start receiving the reports. Having a conversation with those clients after the fact is much less impactful than having that conversation before the fact.”

Demonstrate value

Likewise, IDC Worldsource has a mutual fund company, Worldsource Financial Management, to help out its dual-licensed reps.

Wachtel said it’s important for advisors to demonstrate to the client the value of both the products and advisors themselves.

He suggested that advisors outline in the client engagement letter the benefits of a segregated fund and the value the advisor brings to the table.

One component clients know little about is how much time advisors spend on compliance, including keeping up with manuals, training staff, and generally making sure they understand the different rules and regulations – all of which take time and money.

“That’s something the advisor shouldn’t hide from the client,” he said. “I think most clients want to hear that their advisors are aware of the regulations that apply to their industry and here are the steps they take in their practice to ensure that they are obeying … industry regulations.”

IDC Worldsource sends out regular email compliance bulletins to its advisors, explaining the new tools that will be crucial as the new segregated fund disclosure reality sets in. One such tool is a sales charge disclosure form explaining the four types of segregated fund purchase options. The advisor and the client should take a deliberate approach to matching the investment and structure to the investor’s needs and wants, said Wachtel.

Like other MGAs, IDC Worldsource is in the midst of regular roadshows across the country, where the new disclosure recommendations will be a major topic of conversation.

It is also taking on a new approach by having online training for advisors. Wachtel said there is a large selection of videos that can be matched up with CE credits.

There has been no word yet as to the timing of the new segregated fund rules. The CCIR paper points to a mock-up of a prototype that will be released in early 2018. Further consultations will take place as insurers discuss the industry minimum standards they must put in the disclosure documents, while insurers have the flexibility in terms of layout and can adapt their disclosures to ensure that the language and terminology is consistent with the insurance contract and Fund Fact documents.

A measured approach

Wachtel guessed that the new regulations will not come into force this year. “I see a careful and measured approach and it’s clear to me they want to proceed carefully and get it right the first time.”

Dewdney said the new CCIR recommendations are needed to provide more of a level playing field between mutual and segregated funds, one that will be more beneficial for the client experience.

“If we are doing our jobs and we are adding value for the clients I don’t think any advisor should be scared off by the heightened disclosure. I think they should embrace it.”