Canadian investors began receiving annual personalized investment reports that provide detailed information about the fees they paid and investment performance from their financial advisors a year ago. Although it’s early days for these reports, which were mandated as part of the second phase of the client relationship model reforms (CRM2), recent research suggests they are having a positive impact.
First and foremost, it’s important to assess how well investors understood these first reports. Several studies conducted both before and after the introduction of these reports show an increase in Canadian investors’ knowledge as well as in their confidence in making investment decisions.
Research done for the B.C. Securities Commission (BCSC) revealed that familiarity with direct and indirect fees grew to 67% of investors in 2017 from 56% of investors in 2016. During this same period, there was an increase in the percentage of investors who understood that some fees can be negotiated; that similar products can have different fees; and that every dollar paid in fees reduces their returns.
Furthermore, awareness of dealer fees rose to 85% in 2017 among investors who have an advisor and purchased a mutual fund in the past year from 72% in 2015, according to research conducted by Pollara Strategic Insights on behalf of the Investment Funds Institute of Canada. Research from Credo Consulting Inc. also found that awareness that advisors charge fees increased by 6% between 2016 and 2017 among investors who have an advisor. And the number of investors who stated “I know exactly how much my advisor is paid” rose by 13%.
The investment funds industry has made considerable efforts to design the reports using plain language and simple designs to improve understanding, without overwhelming investors with too much detail. Steps also were taken to equip advisors to have meaningful conversations with their clients about the new information.
According to the Canadian Securities Administrators’ 2017 Investor Index survey, 71% of investors who recall receiving the new reports stated that the information is easy to understand and 72% said that the reports helped them understand the fees they pay.
Several of the surveys looked at whether improvements in knowledge led to changes in behaviour. The results here also were positive.
Specifically, the BCSC found that after the new reports were distributed, 13% of investors engaged in new communication with their advisors, 21% changed products or fee arrangements, and 9% changed their advisor or firm. That means 43% of investors took some action. Similarly, the CSA found that 35% of investors spoke with their advisors after reviewing their reports and, of these investors, 44% made changes to their accounts.
These research findings demonstrate that disclosure, done well, can result in more informed investors who are more comfortable asking questions and becoming more engaged in their investment decisions. This improvement in investor knowledge and confidence, after just one year, is very encouraging. This is a good start.
The investment funds industry is keen to build on this early success to further expand investor knowledge and confidence. Specifically, the industry is working in partnership with regulators to further enhance the disclosure investors receive so that the full costs and benefits of their investments are well understood.
In addition, the industry is fine-tuning and further simplifying how this fee and performance information is presented — as well as exploring how technology can better deliver information to investors when and how they want it.
This is important work. The industry will continue to invest in research to ensure these efforts are effective.