Do investors understand their fees, portfolios?

Getting into the minds of investors is never easy, but findings from a four-year Canadian Securities Administrators (CSA) study that were released today may provide some clues.

The multi-year research project — which began with a baseline survey in 2016, followed by six successive survey waves of approximately 2,000 people between 2017 and 2019 — was in part introduced to assess the impacts of industry requirements that have come along as a result of the second phase of the client relationship model (CRM2) and Point of Sale (POS) amendments.

The CRM2 amendments required heightening disclosure of investment, fee and relationship information, while the POS rule changes required that investors receive plain language documents, such as Fund Facts, that are easy to understand.

The surveys were designed to examine what people know “about fees and the performance of their investments, and how they interact with advisers,” said the CSA in a release.

The collective survey results revealed some positive trends. For example, the regulator’s summary report says, “Both the percentage of investors who reported knowing the amount of fees they pay and the percentage of investors who were aware they paid fees have been increasing since 2016.”

While findings varied across different regions and client-advisor relationship types, the survey results indicated that between 2016 and 2019 respondents increasingly noted the importance of monitoring the fees they are charged. As well, more respondents said they understand the impact of those fees on investment returns.

Drilling into the data, the release said 51% of those surveyed in 2019 reported they knew that fees had an impact on their returns, up from 41% in 2016. This boost was largely driven by more investors saying they are aware that they pay fees for the operation, management and administration or their investment accounts, said the CSA.

Still, the release said, “almost half of Canadian investors are not aware of such fees, and the same is true of indirect fees (such as payments made by investment funds to dealers).” The CSA report also notes that “readership of statements has remained unchanged since 2016.”

Alongside looking at fees, the regulator investigated seven other areas of interest: understanding of investment performance; the value of advice; client-advisor conversations; conflict management by advisors; factors that go into making a purchase, such as use of fund documents; how advisors use Fund Facts in particular; and the use of written investment plans.

In the first area, the CSA’s findings showed more investors said they feel confident about monitoring changes in the value of their investments over time (86% of respondents in 2019, compared with 80% in 2016) as well as assessing whether or not those investments are helping them reach their financial goals (82% in 2019, up from 76% in 2016).

Despite these boons, “progress is fleeting or non-existent” in some areas, the CSA said.

There seemingly was a decline, for example, in how satisfied investors were with their relationship with their advisors between 2016 and 2019.

Eighty-eight percent of respondents were satisfied with their advisor relationship in 2016 and that dropped to 83% in 2019. At the same time, there was a 5% gain in the number of people who were undecided on how satisfied they were (14%, down from 9% in 2016).

Respondents were also more likely to say that they would change firms and advisors in 2019 than they had been three years earlier.

In 2016, 19% of investors reported having already made a switch, or being very likely or somewhat likely to change firms, the CSA said, adding that “this figure had risen to 23%” by 2019. As for switching advisors, 25% of respondents said they had or were likely to in 2019, up from 22% in 2016.

In relation to the discussion of fees prior to making a purchase, less than half of investors who had made a purchase in 2019 (44%) said this occurred. That compared with higher incidents of that happening in 2017 and 2018 over both 2019 and baseline 2016 data.

There was also a slight regression in 2019 in the percentage of investors who said they have an investment plan: 41% in 2019, down from 42% a year earlier.

Yet, the CSA said, “it is important to note how differently investors respond to this question based on their advisor relationship” given the differences between discretionary and non-discretionary approaches in particular.