A few weeks ago, the MFDA issued a Discussion Paper on Expanding Cost Reporting as a follow-up to current CRM2 disclosure requirements. The paper highlights their belief that cost reporting to clients is incomplete and inhibits investor understanding of their total costs of investing.

Based on research I’ve done with investors and numerous other studies that have been conducted, I would agree.

Although CRM2 cost reporting has been a big step forward, many investors still find it confusing. They believe that the costs they see are all the costs they incur in investing. It would be good to provide clarity for investors, and correct these misconceptions.

My research has also shown that the way in which many firms have provided CRM2 disclosure in fact limits client understanding of their performance and fees.

Two things we discovered in our research into investor reactions to CRM2 reporting:

  • Reports use terms investors don’t understand. Many firms use terminology in their CRM2 Reports that investors don’t understand, such as “trailing commissions”.  Even the words “Cost and Compensation” are confusing for investors. Some investors believe that “cost” is what they pay, and “compensation” is what they receive. Obviously, this isn’t an impression we want to leave with them.
  • Reports provide too much detail. The goal of CRM2 reporting was to provide investors with helpful information about their investments. But, in some cases, the reports include too much detail and just end up confusing or overwhelming them.

While the regulators’ goal with CRM2 (and with this initiative) is transparency, that goal has so far proved to be somewhat elusive in implementation.

The MFDA’s paper considers disclosure of the full Management Expense Ratio (MER) of investment funds and other transactional costs associated with owning funds, as well as the question of whether cost reporting should be expanded for other investment products.  The MFDA has invited all stakeholders and interested parties to provide their comments on the Discussion Paper.  While the regulators may not refer to this initiative as “CRM3”, many in the industry have adopted that phrase.

While I applaud the MFDA’s efforts to improve investor understanding of the full cost of investing, I have some general comments I’d suggest they keep in mind.

Considerations for better investor outcomes:

  • Less is more. It’s beneficial to inform investors about the total cost of owning investment funds, but resist the temptation to provide too much information. Too much detail clouds transparency.
  • Keep it simple. Since most investors aren’t very familiar with MERs, providing detailed disclosure about the different components of MERs is unnecessary.
  • Leverage what we learned from CRM2. I have conducted numerous research studies that demonstrated what worked with CRM2 reporting, and what didn’t. These types of insights should inform next steps.

I look forward to hearing what other firms and interested parties think about the MFDA’s proposals in their Discussion Paper.

If you’re interested in hearing more about the insights we gleaned from our CRM2 research with investors and advisors, please contact me at Susan.Silma@Purefacts.com.

Practice Leader, Client and Industry Strategy