Embedded fees in mutual funds sold in Canada are already high, but when they are charged to clients within fee-based investment accounts, the situation goes from the sublime to the ridiculous.
As the country’s investment-advisory industry adjusts to new regulations for reporting investment management fees, disturbing news of substantial overcharging of clients by a major bank underlines the urgent need for full disclosure of all fees paid by an investor regarding the management of his or her investments. Last week it was announced that the Canadian Imperial Bank of Commerce has agreed to repay more than $70 million in excess fees charged to clients of its investment advisory operations. Here is a summary of this settlement and the regulatory backdrop:
These massive compensation payments underline the need for transparency between investment advisors and their clients. While new rules under the second phase of investment regulators’ Client Relationship Model (CRM2) require disclosure of all fees charged directly to an investor, the resulting new portfolio statements will not include mention of fees charged by fund managers, which form part of a fund’s MER and are subtracted from a fund returns prior to final amounts appearing on those statements.
At PWL, we believe full fee disclosure is necessary. We also believe advisors should have no conflicts of interest and no tied-selling conflicts. They should be required to clearly disclose when they are selling their firm’s own products or securities that their firm has underwritten. Moreover, financial advisors should have a fiduciary duty to their clients. This is not a requirement under Canadian securities law, and best-interest standards being proposed by regulators under a “CRM3” fall far short of what is needed.
As part of our commitment to acting in our clients’ best interests, PWL recently received certification by the Centre for Fiduciary Excellence (CEFEX)*. We are one of the first investment advisory firms in Canada to successfully complete the independent certification process.
PWL is also working toward establishing a Canadian chapter of the Global Association of Independent Advisors (GAIA). GAIA’s Fiduciary standards rise well above the limited performance reporting requirements governing today’s investment management industry.