The key to navigating advisor fees is knowing what you don't know

[A financial advisor can be very helpful, but you shouldn’t blindly trust the person handling your money.]

CIBC reached a settlement with the Ontario Securities Commission this week over allegations the banking giant had overcharged fees to clients over the past 14 years.

The OSC suspected that as far back as 2002, CIBC clients with fee-based accounts paid embedded fees included in the overall account management fees on products ranging from mutual funds to exchange-traded funds. The securities watchdog also alleged that some clients weren’t advised that they qualified for lower-cost mutual funds within the same class.

But the bank is part of a series of financial institutions that have faced scrutiny over fees – including Scotiabank, CI Investments and TD Bank – and part of a wider push by regulators to promote sturdier transparency between advisors and investors.

“Informed investors are happy investors, especially during times of market volatility,” says Nathan Parkhouse, an investment advisor and portfolio manager with Gravitas Securities. “(But) in order to appreciate the value of advice being provided, a client needs to be informed of how much they are paying, how they are paying and to whom.”

Knowing what you should know

With the Client Relationship Model – Phase 2 in full swing, investors are likely to see more transparency surrounding what they’re paying come January 2017.

“All mutual fund fees are disclosed via prospectus as per long standing investment industry regulations,” explains Parkhouse. “The new change relates more to the dealers having to specifically disclose advisor compensation in advance of an investment purchase and ongoing on client statements.”

The Management Expense Ratio (MER) fees include advisor compensation, which Parkhouse says is typically one per cent, and fund manager compensation, which falls in the 0.8 to one per cent range. Then there are the operating costs of running the fund, which vary.

“The Average Canadian Balanced fund total MERs are around 2 per cent, equity and global funds (are) a little higher at 2.25 per cent (and) fixed income funds a little lower,” he points out that MERs are annualized fees, and are charged daily. “The MER is built into the Net Asset Value (NAV), priced daily, thus fund returns are always published net of the MER.”

Knowing what you don’t know

But it’s not just about disclosure; it’s about how those fees are explained to investors.

Anthony Boright, president of InvestorCOM Inc, which has a suite of tools for compliance in the financial sector and communicating with investors, says the latest push for transparency has also asked for clearer communications.

“When you’re dealing with a complex subject, you don’t know what you don’t know,” says Boright adding that many investors don’t even know what they should be asking. “It’s a daunting question and one that many avoid (but) these CRM2 forms lay out in much clearer detail what the performance has been and what the fees are that they’re paying for that performance.”

That was the goal with Fund Facts, short two- to three-page fact sheets on investment products free of legal jargon.

“(And) delivering them before the purchase decision so advisors can have conversations with their clients about the fees, about their performance past and going forward and the makeup of the portfolio,” he adds. In addition to knowing what you’re paying in fees, Boright also recommends digging deeper into the fee structure – when do you pay? And do you pay even if your portfolio is down?

He points out that while regulators are banking on investors being more informed through the Fund Fact forms, the hope is it will foster stronger communication between investors and advisors.

“There’s lots of research that says the average person spends less time thinking about their retirement and RRSPs than they do about what TV show to watch that night,” he adds. “I think regulators have really just been trying to raise financial literacy (and get) us as investors to take a more active interest in these big decisions.”