Couple getting financial retirement advice from consultant at home

“Lucy, you’ve got some ‘splaining to do!”

This well-known exclamation comes from the classic TV series I Love Lucy. When total cost reporting (TCR) is implemented, advisors may start hearing a new version of it from their clients.

Will TCR shake up the industry? That remains to be seen, but investors will undoubtedly have a lot of questions.

TCR is a joint proposal by the Canadian Securities Administrators and the Canadian Council of Insurance Regulators, and is intended to enhance and harmonize cost disclosure for investment funds and segregated funds. It’s part of an ongoing global shift toward increased fee transparency in the investment industry. The proposal applies to all investment funds, including mutual funds and ETFs, as well as seg funds.

TCR’s enhanced transparency is intended to ensure that investors see all their costs, on an ongoing basis, so they can make more informed decisions about their investments. The regulators also hope that harmonizing the requirements for investment funds and seg funds will make it easier for investors to compare securities and insurance products.

This proposal builds on the fee disclosure requirements in the Client Relationship Model, Phase 2 (CRM2), which launched for the securities industry in 2016. Regulators view TCR as the logical next step to the annual fee and performance reporting introduced under CRM2. While CRM2 provided added visibility of the fees that investors pay, regulators received survey feedback that investors mistakenly think the CRM2 fee report provides them with all their investment costs.

Under TCR, firms would be required to provide investors with additional information about the built-in costs of investing, in both dollar and percentage terms. This includes all embedded product costs, including the management expense ratio (MER) and trading expense ratio (TER), which total to the fund expense ratio (FER).

The regulators indicate that, while cost information is provided to investors at purchase, there is currently no ongoing reporting to investors and policy holders on the amount of those costs after purchase. The regulators see this as a significant gap. Accordingly, the TCR proposal would require including the FER, as a percentage, in ongoing client reporting, specifically in the monthly or quarterly securities account statements.

Including fee disclosure for seg funds will be a big lift for firms, as the funds don’t currently fall under the CRM2 requirements. The proposal also seeks to improve seg fund policy holders’ awareness of their rights to guarantees.

Each firm has the flexibility to provide the reporting in a format of their choosing. It will be interesting to see how or whether the cost reporting will provide a true apples-to-apples comparison for investors. How easy will it be for a client to compare one investment fund to another, or to compare a mutual fund to a seg fund?

While TCR is still a proposal, and the regulators received numerous comments from both investors and the industry at the close of the comment period in July, the regulators have indicated they are intent on launching it by September 2024.

Whether or not TCR is adopted by then, it’s coming. The regulators continue to push for full transparency, or what I like to call radical transparency. That means you should be prepared to openly discuss all the costs of any investments you recommend. Regardless of the details of the final rules, it’s clear that all costs involved in buying and holding investment funds and seg funds will be put in investors’ line of sight.

Tips for advisors to prepare for TCR

  • If you’re not having transparent fee conversations with your clients about all the costs involved in their investment choices, now is the time to start. Get in front of the regulations so that clients aren’t caught off guard when they see the full fee picture in their statements.
  • If you’re having fee conversations with clients but are finding those discussions a bit tough, try to work them into a more comfortable conversation. Specifically, help clients understand the value you provide. Clients are not averse to paying fees, but they don’t like to be surprised, and they want to understand what they get for those fees.
  • Your value is not just your ability to generate returns. Especially in today’s volatile environment, it is difficult to keep promises about short-term returns. The real value you provide is your advice that helps clients articulate their goals and develop plans to meet them, and then keeping clients on track.
  • Don’t be fearful about radical transparency regarding fees. Instead, view TCR as an opportunity to build trust with skeptical clients. If fees and value are presented in the right way, clients may better understand and appreciate the value of your advice.
  • Fee disclosure will go only so far in educating clients. Experience with CRM2 indicates that cost is an area that they find difficult to understand. Take the time to discuss fees with clients, who’ll be appreciative. If you don’t, someone else will.

Susan Silma is head, regulatory business practices, with Sun Life Financial Investment Services. She is a lawyer and former regulator, and is passionate about integrating compliant practices into a positive advisor-client relationship.