Better Investment Fee And Performance Disclosure Might Help

by Mike Holman

Rob Carrick wrote about breaking the seal on the information vacuum where he covers recent proposals by the OSC and other regulators to force investment companies to disclose more information to investors.  Mr. Carrick says that as a result of these changes “Things are going to be a lot different around here”.

The financial information that investors will start to see on their statements are:

  • Annual summary of all fees and commissions paid in the account in dollars, not as a percentage.
  • Annual investment performance.

While, I think these change are a great idea, I don’t think this will make much of a difference for most investors.  This is not a Neo eats the red pill kind of breakthrough.

There are a number of reasons why I don’t think the information will help many investors.

Most Canadian investors are clueless

It’s my opinion that most investors fit the following profile:

  • They don’t read investment statements. Any statements received in the mail are quickly tossed, electronic statements go unread. It doesn’t matter what information is in an unread statement.
  • They don’t want to know about fees. It’s a chore for most Canadians to save money to invest and actually buy some investments.  As long as their account balance is increasing, they are happy.
  • They think fees are irrelevant. Most investors buy actively-managed funds to beat the market. Who cares what fees are being charged if you have a great fund manager?

Fee and performance information won’t have enough context

With the new proposals, investors will see how many dollars they are paying for their investments and their advisor.  The problem is that this information is really only useful if you can compare that figure to fees charged by other options such as other mutual funds or different investment products or even a do-it-yourself solution.

The services received by the investor has to be considered.  If an investor with $100,000 is paying $2,000 per year in fees – is that too much for the investment management and financial planning (if any) they are getting?  The investor would have to be aware of the various alternatives and their costs in order to make an informed decision.

Investment performance numbers are only useful in the context of the investor’s financial plan. Will the performance numbers be measured against an appropriate index? Annual performance figures are good, but the long term numbers are what really matter.  I’m assuming that a good advisor will work with the investor to help them understand all this, but that won’t always be the case.

Hide the figures with bafflegab

The best way to hide information is to withhold it.  As Mr. Carrick noted, Canadian investment companies are very adept at this strategy. 

The next best way to hide information is to provide it in such great detail that nobody reads it. If I’m an investment company with over-priced, underperforming products I would implement these proposals in such a way that the current two page quarterly report will balloon to 12 pages of mind-numbing columns of numbers. 

Conclusion

For an investor to truly appreciate the fees they are paying and make an informed decision on the value of those fees, they have to evaluate a lot of information.  This information can only be gained by education – a quarterly or annual statement is just not going to do the job.  It’s up the investor to educate themselves and most won’t do it – even if you hit them over the head with the proper information.

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{ 3 comments… read them below or add one }

1 DanP

I’d actually be concerned if this does happen. One problem i see is one you mentioned, that pepole are not educated. Now it’s easy to say that they should go out and educate themselves, but they just won’t do that. I’m sure people know that McDonalds is bad for them, but they still eat it. People know that they should go out and educate themselves, but they won’t. I’d be worried that by saying their 100k porfolio “lost” $2000 dollar in fees, that they would say that’s outragous, and go out and do their own investing without educating themselves. It’s incredible how many people i talk to that say they can pick better stocks than mutual fund managers, then go out and buy nothing but oil stocks but oil will never not be in demand. By showing the “lost” value to be $2000 strikes me almost as a scare tactic and i truly think this might have a negative impact on people’s finances, as opposed to making them more informed.

2 SavingMentor

Parsing through all the technical investment jargon and numbers can definitely be taxing – especially for those people who aren’t detail oriented. It really is a shame.

Hopefully positives changes will come and it will become easier for people to make intelligent choices without doing endless hours of research and reading first.

3 Sustainable PF

Thing is SM, lots of people still won’t pay attention.

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