What Is Total Cost Reporting and How Will It Benefit Clients of Asset Managers?
Total cost reporting is coming to Canada and the new mandatory disclosure rules will make it easier for investors to actually see and understand any fees tied to their investments.
In April 2023, the Canadian Securities Administrators (CSA) and the Canadian Council of Insurance Regulators announced total cost reporting changes designed to improve fee disclosure reporting requirements for investment funds and individual variable insurance contracts.
The annual report you receive from your asset manager already includes a lot of information, but new total cost reporting changes will make it easier to see the embedded fees you pay on investment funds like mutual funds, exchange traded funds (ETFs), and scholarship plans.
The total cost reporting disclosure will include:
The total dollar amount of investment fund expenses
Charges for all funds owned by the investor
The fund expense ration (FER) for each fund held in the portfolio
FER is represented as a percentage; it’s the sum of the management expense ration (MER) and trading expense ratio (TER). TER covers the costs of trades executed by the certified asset manager overseeing the funds.
With total cost reporting, investors will also receive information about the performance, cost, and guarantees for segregated funds. Segregated funds do not currently send out annual reports.
Mandatory total cost reporting requirements take effect for the calendar year ended December 31, 2026. Investors will receive their first total cost reporting disclose in early 2027.
What Are Investing Fees?
As with almost anything you buy, investment products come with fees and costs. Unfortunately, most people do not fully understand the costs they pay to buy certain investment funds and how they affect the value of their total portfolio.
For example, when you buy or sell a stock through a broker, you are charged a fee. That one is easy to see on a statement. There are some less obvious, embedded fees though, that are a lot more difficult to spot and understand.
Exchange traded funds (ETFs) and mutual funds have embedded fees. These fees are paid to the fund company issuing them not the portfolio or wealth management professional who distributes them. That said, it’s not entirely uncommon for those fees to be passed onto the advisor in the form of a trailing commission.
With new total cost reporting rules, it will be easier for investors to see the fees they pay when they receive their annual investment statement.
Fees and expenses are often expressed as a percentage; the typical expense ratio with an ETF is less than 1%. Mutual fund fees in Canada are among the highest in the world, with an average MER of 1.98%. But because the number looks small, investors often don’t pay much attention.
But they should. Those fees can really reduce the value of an investment. Even one that is a fraction of a percentage can really add up over time. That added expense can also undermine the compound growth you could have made if that money remained in your account.
Case in point, if your investment portfolio is valued at $100,000 and you pay 0.50% in annual fees, you’re losing $500 to fees every year. On a mutual fund, you’re losing $1,980 per year.
The number is much more drastic over the long run. Over a 20-year period, that 0.5% fee will reduce the portfolio value by $10,000. If the fee is one percent, you’re losing approximately $30,000.
Thanks to total cost reporting, Canadian asset managers will need to report the total costs of owning investment funds and segregated funds in their client’s annual investment statement. The information will be shown as both a percentage for each fund, and an aggregate, or the sum, in dollars, for all funds in the client’s portfolio that year.
Right now, it’s up to you to hunt down this information, figure out the dollar costs of those percentage fees, and how those confusing fees are impacting your account. This lack of transparency makes it extremely difficult for investors to evaluate the service they are receiving and make informed decisions.
Sharp Asset Management for Your Retirement Planning
If you live in the Greater Toronto Area and are looking for a private wealth management firm, it’s imperative that you understand the fees you are being charged. After all, embedded costs of owning ETFs and mutual funds, including FER, TER, and MER can really add up.
Sharp Asset Management is an independent Portfolio Management firm that is 100% owner operated. We are not affiliated with any financial institution, securities firm or mutual fund company; as a result, our investment decisions are unbiased. Nor do we earn any commissions or fees on investments we choose on behalf of our clients.
All of our investment counsellors are charter financial analysts, the highest level of achievement, and have over 10 years of experiencing managing portfolios. To learn more about investing with Sharp Asset Management, contact us today.
