Financial advisors and their dealers are preparing to provide clients with fee, commission and performance disclosure, starting in July 2016.

Although many of you seem to be fretting about the disclosure of fees and commissions because the disclosure details are somewhat misunderstood, what you should be worrying more about are the performance reports, which are likely to be a somewhat unpleasant eye-opener.

First, fee and commission disclosure. This is a huge step toward improved transparency. All fees that the dealer charges directly to clients will have to be disclosed in writing. All commissions also will form part of this disclosure.

However, for clients holding mutual funds, the disclosures will exclude a significant portion of clients’ total investment-management costs. National Instrument 31-103 will require dealers to disclose all trade-related charges – switching fees, front-end loads, etc. – on trade confirmations. As well, dealers will be required to provide clients with annual reports listing all amounts charged directly by dealers to clients – and all commissions received with respect to the client’s account.

All of the items to be disclosed within the next two years are for items that flow through dealer back-office systems to enable accurate accounting. But management fees on mutual funds are charged by the fund sponsor – not by the dealer.

So, roughly half of the stated management fee ends up being paid to dealers in the form of commissions. But the other half will remain absent from the annual reporting of charges and compensation.

The impact? The report of charges and compensation will be revealing and create greater accountability, but it still won’t tell clients their total cost of money management.

Meanwhile, it’s the performance report that should put a bit of fear into the minds of dealers and advisors. Clients always have had the data required to calculate their personal rates of return but only a few clients actually do it. Most dealers don’t generate personalized performance reporting. And although the report of charges and compensation will omit significant costs, the performance report inherently will include everything paid by clients. I believe that both long-term clients and the financial services sector will be unpleasantly surprised by what they see on the first 2016 performance reports.

In the past 16 years, I have spent hours poring over fund flow data to calculate estimated investor returns. Perhaps the most striking result was that stock fund investors earned about 4.5% a year – about the same as guaranteed investment certificates – during about 15 years from November 1993 through July 2008.

During the same period, a broad cross-section of global stock indices returned 8%-9% a year. The difference – i.e., the equities risk premium – was wiped out by fees, the impact of active management, buying and selling at suboptimal times and the use of volatile specialty funds that sport notoriously poor investor performance. Investor returns in the broader group of long-term funds were about a percentage point higher.

I’m updating my calculations but, so far, the conclusions aren’t looking much different. So, start preparing for tough questions from clients when they see lower than expected returns.

Dan Hallett, CFA, CFP, is vice president and principal with Oakville, Ont.-based HighView Financial Group, which designs portfolio solutions for affluent families and institutions.

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