Most investors do not understand investment fees. What can be done? |
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In our July newsletter, we highlighted the impact that fees can have on lowering your investment returns.
To make you more aware of fees, your investment advisor is required to send you a statement showing the fees he or she receives, either directly or indirectly, from you each year. However, the statements you receive today do not include the total costs of your investments.
While regulators are currently looking into improving your annual fee statements to include total costs, new research commissioned by the MFDA reveals an even deeper problem – many investors do not understand the fee information they currently receive.
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Here are some findings from the MFDA’s research:
---Investors, even experienced investors, struggle to understand key terms and how ------their choices affect the fees they end up paying.
---While many investors consider the annual fee statement important, less than one in ---five can identify the different types of fees captured in the statement.
---Investors are not told what they can do to reduce their fees.
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Since fees can really hurt your investment returns, we encourage you to learn more about the different types of fees and how they affect you.
The MFDA's team did extensive research to see how well average investors understood fees and what could be done to improve their understanding. They also asked how important it is to investors that they be told about the total costs of their investments each year.
The research provides invaluable insights on how annual fee statements need to be improved. Several recommendations are included in the report, which FAIR Canada fully supports. These include:
---Eliminate unhelpful information presented in the fee summary.
---Clarify key terms and use plain language that ordinary people understand.
---Make the most important information more prominent and clearly visible.
---Include a statement about the importance of fees and how they impact you.
---Explain what actions you can take to reduce your fees.
FAIR Canada will continue to advocate for improved fee disclosure for all investors. And we will encourage regulators to take this research to heart when they develop the new and improved “total cost” annual fee statement.
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New rules are coming to protect vulnerable investors. Could they help you or someone you know? |
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In our May 2021 newsletter, we highlighted the work by Canadian securities regulators to address issues of diminished mental capacity and financial exploitation of older and vulnerable clients. This work is now complete and new rules will come into effect on Dec. 31, 2021, along with new conduct protocols and guidance for advisors.
These rules will go some way to implement recommendations published in November 2017 by FAIR Canada and the Canadian Centre for Elder Law.
Unfortunately, the rules do not provide any protections to advisors who could be sued for trying to protect you and your assets in difficult circumstances. In our 2017 report, we recommended that a safe harbour be provided in law to protect advisors from being sued in these circumstances. Will the lack of a safe harbour reduce the impact of the new rules? We hope it does not. We also encourage regulators and industry to closely watch whether vulnerable investors are in fact better protected under the new rules.
Trusted Contact Person (TCP)
Under the new rules, your advisor will have to take reasonable steps to obtain contact information for someone you trust, along with your written permission to contact that person in specific circumstances. For example, if you become ill, or your advisor thinks you are being financially exploited by someone who is caring for you, your advisor could contact your trusted contact person, or TCP. Your TCP cannot authorize transactions on the account and is different from someone acting under a power of attorney. Rather, your TCP is intended to be a resource to help your advisor protect your financial assets in difficult circumstances. Keep in mind that while your advisor is required to ask you for contact information for a TCP, you are not required to have a TCP.
Vulnerability can affect investors of any age, can take many forms, and can be temporary, sporadic, or permanent in nature. Consider whether appointing a TCP makes sense for you. And remember, you don’t have to wait for your advisor to ask for your TCP details - you can take the initiative and provide that information today.
Temporary Holds
There is another change coming under the new rules. The firm you are dealing with will be able to place temporary holds on transactions, withdrawals, or transfers in your account if they reasonably believe that you may have become vulnerable (for example, because of illness) or that you are being financially exploited. The ability to place a temporary hold will apply even when you use a discount broker.
If a temporary hold is placed on your account, you will be given notice. Temporary holds can be cancelled at any time. If not cancelled, they automatically expire after 30 days unless your advisor provides you with reasons for maintaining the hold on your account.
The temporary hold is a new tool that your advisor could use in the appropriate circumstances starting next year. However, it is important to remember that your advisor is not required to use the tool, even if they have a reasonable basis to believe you may have become vulnerable or are being financially exploited. Placing a temporary hold on your account is optional. And given there is no legal safe harbour, some advisors may not use the tool because of concerns they could be sued by their client or a client’s family member.
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Your input is needed to improve Canada's complaint handling system |
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Canada has two external complaints bodies (ECBs) for banks and federal credit unions:
(1) ADR Chambers Banking Ombuds Office (ADRBO), a for-profit organization.
(2) Ombudsman for Banking Services and Investments (OBSI), a not-for-profit organization.
The purpose of an ECB is to provide a free and impartial review of complaints from consumers and recommend a resolution that is fair in the circumstances. In some cases, this may include a recommendation that you be financially compensated.
Between November 2018 and June 2019, the Financial Consumer Agency of Canada (FCAC) conducted a review of the banks' internal complaint handling and the effectiveness of the two Canadian ECBs. The results, particularly when it came to ADRBO, were disappointing in some areas. As a follow up to that review, Canada’s Department of Finance issued a consultation paper seeking public input on how to improve the two ECBs to provide better protection to consumers.
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In reviewing ADRBO and OBSI, the FCAC found several issues, such as:
---The process for making a complaint is confusing for most people.
---ECBs take a long time to handle complaints.
---ECBs need to be more accessible to the public.
---Many consumers dropped their complaints rather than escalating them to an ECB ----- when they were not satisfied with the resolution provided by the bank’s internal ----------process.
---Banks get to choose which ECB they want to use, but consumers don’t get a similar ---choice in where their complaint is handled.
---The decisions made by ECBs are not binding. This means a bank can refuse to ---------follow an ECB’s recommendations that a consumer be financially compensated.
---ECBs are not doing a good enough job identifying and reporting issues that have the ---potential to affect other consumers.
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You can provide comments and suggestions on how to improve the complaint handling system until October 14. We urge those who have had issues making a complaint to share your thoughts with the Department of Finance on how to improve the process. Your experience will provide them with invaluable information and could make a difference for other bank customers that may have a complaint in the future.
Have a complaint against your bank today? Here’s what you need to know
Right now, if you have a concern with your bank, you can make a complaint using the bank’s internal complaints process. Under the existing rules, banks must have internal procedures to help you resolve your complaint. If you go through this process and you are unhappy with the result after 90 days, or 90 days have passed since you complained to the bank, your complaint can be brought to one of the two ECBs for resolution.
Check out this Government of Canada website for further details on how to make a complaint against your bank.
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Toronto, Ontario M5C 2C5
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