EZRA BAILEY/GETTY IMAGES. Jennifer Paterson. 18 July/August 2016 BenefitsCanada

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1 EZRA BAILEY/GETTY IMAGES By Jennifer Paterson 18 July/August 2016 BenefitsCanada

2 With the third phase of the Client Relationship Model, Phase 2 (CRM2) rules around fee disclosure in Canada now in effect and new regulatory actions in countries such as Britain, Australia and the United States dealing with compensation in the financial services industry, what s the landscape for transparency around workplace investments in this country? It s a complicated issue due to separate regulatory bodies in Canada s financial services industry for insurance and securities companies. According to Benefits Canada s 2015 capital accumulation plan suppliers report, the majority of Canada s top providers are insurance companies, while securities-based organizations, such as banks and brokerages, account for a smaller segment of the market. CRM2 primarily affects retail rather than institutional investors, because of the regulatory separation between securities and insurance products. As a result, it s unlikely CRM2 will affect large plan sponsors because they typically negotiate directly with an insurer, says Greg Hurst, a pension consultant with Greg Hurst & Associates Ltd. in Vancouver. However, the rules will affect organizations that provide group RRSPs and other types of capital accumulation plans through a securities firm, such as a bank or brokerage. Developments abroad While CRM2 is a big issue in Canada, there s also a lot happening in other countries on fees. The aim of Britain s retail distribution review, which came into effect on Jan. 1, 2013, was to bring more transparency to payments for financial services. Since then, all independent financial advisors and employee benefits consultants receive fees rather than commissions, with plan sponsors agreeing upfront on how much investment advice will cost and how they ll pay for it. The main concern raised in the wake of the British review was around an advice gap, says Andrew Power, a partner at Deloitte in London, England. For those with less to invest, it s been either harder for them to get advice because for advisors it s not worth their while, or they have not wanted to go through a full advice process because, they may say, My needs are simple. I don t have a lot of money to invest, he says. In a workplace context, the amount of money employees have in their employerprovided pension is often quite small, so it s not very economical for an advisor, he adds. There are a few smaller companies that provide advice in the workplace and there are quite a lot of independent financial advisors that will provide it, but it s not been very systematized. In Australia, the government enacted financial advice reforms in July 2013 to address conflicts of interest in the industry around financial commissions and product placement. The reforms, which largely focused on retail products, also had an impact on workplace advice because there was a ban on the commissions paid on term insurance included in superannuation plans. There was also a broad ban on volume-based payments, says Matthew Williams, senior vice-president and head of defined contribution and retirement at Franklin Templeton Investments Corp. in Toronto. So if advisors were writing tons of business, they would be paid a volume BenefitsCanada July/August

3 ICONS: ISTOCKPHOTO bonus, which is still permitted in the [capital accumulation plan] space in Canada. Britain s subsequent advice gap also became an issue in Australia. It has put financial advice out of reach for those who might be considered mass market..., says Williams. Financial advisors have fixed costs, and there would be an expectation about how much revenue they will generate from a client. The outcome is that it s improved transparency and fairness in the financial advice industry, which was what was required. In April 2016, the U.S. Department of Labor introduced rules updating the Employee Retirement Income Security Act by addressing conflicts of interest in retirement advice. The rules, which will affect both retail and group advice when they take effect in April 2017, aim to protect investors by requiring those who provide retirement investment advice to abide by a fiduciary standard that puts the clients best interests before their own profits. That final rule essentially makes the relationship between most retail investment providers a fiduciary A PRIMER ON CRM2 The Client Relationship Model is a regulatory effort designed to help clarify investment performance and costs for investors. PHASE 1 WHAT IT INVOLVES: New disclosure rules for advisors and dealers WHEN: Beginning July 2014 Charges, fees and other costs must be disclosed verbally or in writing prior to any transaction. The advisor or dealer must explain to investors what a benchmark is and how it can be used to assess their portfolio. PHASE 2 WHAT IT INVOLVES: Enhanced client account statements WHEN: Beginning July 2015 Investors may request quarterly or monthly statements that disclose the original cost; the market value and opening balance of each fund; which fund carries a deferred service charge; transaction details during the reporting period; and whether an investor protection fund covers an investment. PHASE 3 WHAT IT INVOLVES: Account and fee transparency WHEN: Beginning July 2016 Investors must receive an annual report on investment performance that includes a summary of their account activity over the past year and since they opened it. The summaries must include the market value of all assets at the beginning and end of the reporting period; the market value of deposits, withdrawals and transfers through the reporting period; annual and cumulative change in market value; and a moneyweighted rate of return for the reporting period. Investors must also receive a report on annual charges and compensation that details, in dollars, all operating, transaction and related charges paid to the advisor or dealer. Compensation from third parties made to the dealer must be disclosed. relationship, says Kenneth Laverriere, a partner at Shearman & Sterling LLP in New York. The effect is that the types of compensation that brokers typically enjoy are now prohibited. Again, the U.S. rules largely affect the retail community but they ll also have an impact on the workplace aspect, says Laverriere, because advice around a distribution or rollover from a workplace plan is now classified as fiduciary advice. The brokers, in making that recommendation, have to take into account the investment lineup and the fee structure at the workplace retirement plan, which means that, over time, these large institutional plans are going to have to make decisions about how, if an inquiry is made, they will provide the information. The landscape in Canada The fee structures banned in Britain, Australia and the United States deferred sales charges and trailing/embedded commissions are also of concern in Canada. But none of those countries used data to test the problem, says Douglas Cumming, professor of finance and entrepreneurship at York University s Schulich School of Business and the author of a study commissioned by the Canadian Securities Administrators and the Ontario Securities Commission around those types of fees. The OSC, in particular, is very prudent in looking at empirically based policy-making, he says. The data is consistent with, if an advisor gets a trailer fee, regardless of the quality of the fund, they are more inclined to direct the money to that fund. So that s a problem. Moreover, if funds start to underperform, if one pays a trailer fee and one does not, they are more inclined to recommend that you get out of the fund that doesn t pay a trailer fee and stay in the one that does. That s also bad. Those two things, taken together, empirically confirmed the suspicions that were raised in these other jurisdictions. While Cumming s study isn t directly connected to CRM2, it does relate to it. The regulatory effort was about creating more transparency around investment performance and costs for investors, rather than banning any specific type of fee or commission. It aims to answer two very basic questions from investors, says Susan Silma, co-founder and partner at CRM2 Navigator. How am I doing, and what s it costing me? Those were two questions that were very poorly understood by investors. The regulations, introduced in three phases between July 2014 and July 2016, state that charges, fees and other costs must be disclosed verbally or in writing before any transaction; advisors must provide enhanced account statements; and investors must receive an annual report on investment performance. For the first time ever, investors will be required to get fees reporting in dollars and performance reporting in dollars and percentage terms, says Silma. The view of the Canadian Securities Administrators, which is bringing in CRM2, is similar to the stance taken in Britain, Australia and Britain, except that it doesn t go as far as banning commissions. However, it did publish a separate notice in June indicating that securities regulators are on course to ban embedded commissions. That s in addition to the CRM2 reforms. The question is, where would Canada like to land in light of all these different perspectives? I think they re going to find a middle ground that addresses the unintended consequences that were noted in Australia and the U.K., says Raj Kothari, Toronto managing partner and national asset management leader at PricewaterhouseCoopers. Ed Skwarek, vice-president of regulatory and public affairs at 20 July/August 2016 BenefitsCanada

4 the Financial Advisors Association of Canada, says the organization is supportive of the greater transparency that comes with CRM2 but he adds that if there were a ban on commissions, it would remove one of the ways in which consumers can pay for advice. Consumers are not compelled to pay their advisor through commissions; they can pay by hourly fee or based on assets under management. But study after study has indicated that consumers prefer embedded over a fee for service. Impact on workplace investments There are also transparency questions when it comes to financial advice provided in the workplace. Many providers include a range of online and in-person services as part of their standard offering to employers. When you look at advice in terms of investments in the institutional model with an insurance company, they tend to provide more education than advice, says Jean-Daniel Côté, a partner at Mercer. Most of them provide a second layer whereby, if you want to talk to someone to get advice, you actually can. I think the vast majority of employees are pretty happy to get education or directions, and that part, at the individual level for plan members, is typically part of the overall investment management fee the [defined contribution] provider is charging. For instance, Great-West Life Assurance Co. offers access to non-commissioned, certified financial planners who are salaried employees. At Sun Life Financial, investment advice for plan members is through a customer care centre, also staffed by salaried employees. And what about transparency around investment fees and performance more generally? The 2004 capital accumulation plan guidelines state that sponsors should provide members with an annual performance report and a statement of their account that includes how to get specific information on each investment option, fees and expenses. But they don t go as far as spelling out whether the reports must disclose the fees. Explicit fee information is not generally included in member account statements, says Hurst. Fees are buried in net investment returns, and published return rates are not net of fees. Members have to actively seek out fee information. Since published rates of return on group retirement products must be gross of fees, my view is that fees should be explicitly deducted from member accounts. Members would thus be passively presented with the actual cost of their plan. Rebecca Cowdery, a partner in the Toronto office of Borden Ladner Gervais LLP, says the regulators tend to think of the most common circumstance first, referring to CRM2 s focus on the retail market, while these little nuances are left until later. There has been very little movement on CAP for a very long time, so it s really hard to speculate here. Another reason there hasn t been a lot of activity on fees and commissions for workplace investment advice is the fact that, where employers provide a retirement savings plan to employees, few actually offer advice outside of the services available from their provider or record keeper. And when it comes to the selection of products, there isn t always a lot of advice for the plan member on what s the best product mix to purchase, says Skwarek. For our own DC plan, I was involved in negotiating it, and that s something I looked at very closely. Were there fees? And I was able to negotiate them down considerably because I was looking at them with a critical eye of understanding exactly how the market works. And I don t know if that s the case for all companies. I see that as a bit of a BenefitsCanada July/August EMPLOYEE BEHAVIOUR AROUND FINANCIAL ADVICE AND INFORMATION What actions did employees take around their retirement savings plans in the past year? 21% consulted a personal financial advisor regarding their employer-sponsored plan 7% contacted the call centre for information or advice regarding the plan 15% used online or hard-copy retirement planning calculators or tools made available by their employer or plan provider to make investment choices Source: Benefits Canada s 2015 CAP member survey APPOINTMENT NOTICE BRIGITTE PARENT, Senior Vice-President, Group Benefits Sun Life Financial is pleased to announce the appointment of Brigitte Parent as Senior Vice-President, Group Benefits, for Sun Life Financial Canada. Ms. Parent joined Sun Life Financial in 1995 and has extensive experience on the Canadian and International Executive Teams, including leading Individual Insurance and Wealth, Client Solutions, and Group Benefits. In 2015, Ms. Parent was recognized as one of Canada s Top 100 Most Powerful Women by The Women s Executive Network, where she received the RBC Champions Award to recognize the difference she has made in helping to advance women in the Canadian workplace. As a key leader of the Canadian Executive Team, Ms. Parent will continue to drive innovation and growth within Sun Life s Group Benefits business as they work to support employees physical, mental, and financial health needs. Life s brighter under the sun Group Benefits are offered by Sun Life Assurance Company of Canada, a member of the Sun Life Financial group of companies. 12% sought out advice from employerprovided qualified individuals on investment choices 12% attended educational sessions on investment options

5 gap in the Canadian marketplace. While the fees for workplace savings plans plans are generally low in comparison to the retail market, the published rates may not reflect costs such as fund operating expenses, says Hurst. The information is always available because of the CAP guidelines, so every plan will have an information sheet that shows the investment management fees for the plan, but they can t transparently see exactly what fees they are paying in respect of their account. Operating expenses, he notes, include activities such as auditing costs and custodial and transactional charges. While he admits operating expenses are usually a small portion of the fees, he says they can be significantly higher, particularly on a new fund with low initial asset volumes. The duty to ensure the fees are reasonable comes down to the plan sponsor, but the provider shares the responsibility for making the information available, says Côté. Many insurance providers do, in fact, provide a lot of information, with rates of return reflecting the fees and the costs to plan members including operating expenses. Some provide a very detailed breakdown of the overall fees and some are bundled, so they aren t as transparent, says Côté. Any plan member dealing with an insurance company has access to that information. For its part, the Canadian Life and Health Insurance Association says there s no issue around hidden fees among its members. The CLHIA s member companies follow the regulator s CAP guidelines, which are very detailed in what insurers must disclose, says Wendy Hope, vice-president of external relations at the CLHIA. There are no hidden fees. But when a securities-related organization provides retirement savings products, things get a bit wishy-washy for the plan sponsor and the members, adds Côté. That s also where CRM2 will have an impact. So, what members will be seeing on their statement is not only the compensation structure, meaning the commission rates payable, but the dollar amounts that have been paid to their advisor, says Côté. All of a sudden, they will go from, It s not costing me anything, to all of a sudden, It s costing me $2,500 a year. We think there are a lot of advisors out there that have not been very active at providing advice to their clients, whose clients will suddenly see they are paying thousands of dollars a year to get no service... no advice, no planning, no nothing. Raising the standards The developments in Canada and other countries raise the question: Is it also time for more transparency when it comes to workplace retirement products? As a plan sponsor, you should be reviewing the fees periodically, because you can go back and renegotiate these as the plan matures and get lower fees, says Hurst. If you haven t paid attention, that s not going to happen. Silma says that regardless of whether or not the regulations 2016 CALGARY DRUG TRENDS Register Now! NOVEMBER 2, 2016 DOWNTOWN MARRIOTT HOTEL, CALGARY COST: $49 + TAX Are you interested in learning about topics that will impact your drug plan? Join us for the 2016 Calgary Drug Trends Summit. $ FOR SPONSORSHIP OPPORTUNITIES: Francesca Allman francesca.allman@rci.rogers.com This half-day event will provide the education and resources plan sponsors and plan advisors need to make the best decisions for their members. Attendees can look forward to presentations examining specific disease states and challenges; new drug treatment categories/ offerings; and key drug trends that keep plan sponsors up at night. Who Should Attend: Employers responsible for drug plans, benefits, wellness, HR, corporate health; brokers, benefit consultants and advisors. For more information, go to: benefitscanada.com/calgarydrugtrends SPONSORS FOR AGENDA INFO: Lauren Harris lauren.harris@rci.rogers.com BECA 0716 CalgaryTrends half ad [Print].indd :57 PM

6 LESSONS FROM ABROAD ICONS: ISTOCKPHOTO BRITAIN S RETAIL DISTRIBUTION REVIEW WHAT IT INVOLVES: Rules that banned commission payments to advisors and benefits consultants selling pension and investment products. WHEN: Jan. 1, 2013 IMPACT ON WORKPLACE ADVICE: The changes introduced two new ways for advisors to be paid: advisor charging (when a financial advisor provides advice on a one-to-one basis) and consultancy charging (when corporate pension advisors provide advice to employers). AUSTRALIA S FINANCIAL ADVICE REFORMS WHAT IT INVOLVES: Legislation covering the best-interests duty, a ban on conflicted forms of remuneration and changes to the Australian Securities and Investments Commission s licensing and banning powers. WHEN: July 1, 2013 IMPACT ON WORKPLACE ADVICE: While the focus was primarily on retail investment products, there was also a ban on the commissions paid on term insurance included in superannuations. UNITED STATES: EMPLOYEE RETIREMENT INCOME SECURITY ACT WHAT IT INVOLVES: Rules to address conflicts of interest in retirement advice that will require restructuring of pay and compliance policies at financial institutions that serve retail retirement clients. WHEN: April 2017 IMPACT ON WORKPLACE ADVICE: Any advice to take a distribution or rollover from a workplace plan is now characterized as fiduciary advice, meaning it s now regulated for the first time. apply to everyone, they may well raise the standard of reporting across the industry. [Institutional investors] may have been getting better reporting all along and are able to negotiate for themselves, but I do see there being a movement, not just from the client side but the firm side, on how to do better on disclosure more generally. Greater transparency is likely inevitable, according to Kothari. That transparency will have to come, even if legislation does not drive it. I think good practice and good governance will force organizations to a place to deliver that. Many of these workplace pension or savings plans are often invested with retail or institutional investors who will still be following the rules anyway. Jennifer Paterson is managing editor of Benefits Canada: jennifer.paterson@rci.rogers.com. CANADIAN PENSION & BENEFITS INSTITUTE THANK YOU TO OUR SPONSORS HEALTHY, WEALTHY AND WISE 2016 CPBI REGIONAL CONFERENCE ONTARIO & QUÉBEC Expert in psychological health SEPTEMBER 12-14, 2016 MONT-TREMBLANT, QC benecaid PROg RAM & REg ISTRATION I ICRA. CA