FSRA publishes proposed total cost reporting rules for seg fund sector

If the rule is approved, life insurance companies will have to provide enhanced annual statements for segregated funds — clearly breaking out total cost information including embedded fees and performance data from the date clients’ contracts began, using plain language.

There will also be more disclosure of guarantees that offer protection against market declines, both in terms of cost to the client and how certain actions might affect those guarantees.

The enhanced disclosures will be sent out annually, starting for the year ending Dec. 31, 2026. Clients will see the first new statements in early 2027. The initiative is meant to give seg fund investors a clearer picture of fund performance and costs so they can be more easily compared with mutual funds and other investment products governed by securities legislation.

Notably, while the rules list 12 types of fees that must be included in TCR, these are only fees that relate to the contract with the insurer. They don’t include advice-only fees clients pay directly to the life agent.

Three exceptions

The rule published Friday includes two exceptions where the insurer doesn’t have to provide data going all the way back to when the contract with the client began. The first is for missing historical data that can’t be obtained, such as a contract that was offered by one insurer then switched over to another. The other is for instances where it would be too expensive to upgrade legacy systems to collect historical information.

There’s also an exception for change events, such as a change in unitholder ownership, securities dealer or tax status (e.g., when a contract is switched from an RRSP to a RRIF account). If the change occurred before the new rule comes into force, the insurer can use the event date as the new reporting start date.

If the change event occurs when the rule is in effect, this exception allows an insurer to “restart the reporting of certain information” that’s required to be reported. This will result in the contract holder receiving multiple statements during the fiscal year: one that uses the date of the change event as the starting date, and another that uses the date of the original contract as the start date.

“In most cases, we would prefer a single statement, but two is better than nothing,” said Jean-Paul Bureaud, executive director, president and CEO of FAIR Canada, an investor advocacy group in an interview on Monday.

Bureaud said that while it could be argued there are too many exceptions, overall the rule is good for investors. “Whether investors are buying a mutual fund or a seg fund, they should be able to see the total costs of their investment, including any embedded fees.”

Advisor impact

While the bulk of the TCR work will fall on insurance companies, life agents will need to ensure they understand the enhanced statements and be able to respond to clients’ questions about them.

Paul Savage, head of individual insurance Canada for Manulife, said the firm is preparing for TCR by focusing on the technical aspects of the initiative and how best to incorporate the required information into client statements.

“We’re also focused on developing robust communications and educational resources to support clients and advisors through these changes,” Savage said in an emailed response to questions ahead of the publication of the proposed rule last week.

“Generally, we find that advisors are supportive of fee transparency and are already engaging in these discussions with their clients,” Savage said. “We’re hearing more than ever that clients are interested in knowing about fees. TCR will put this information directly in front of them.”

The information clients currently get from manufacturers about fees comes through point-of-sale documents, Savage said. “Providing these documents is a regulatory requirement. Additionally, some fees are directly reported to clients on their statements.”

Making a statement

Designing enhanced statements that include the required cost information, and that clients can easily understand, will be a challenge, says Brian Shumak, a financial planner, life agent and principal of Brian Shumak Financial Services in Toronto.

“In 36 years of practice, I have never seen a statement that a non-industry person will be able to follow without any question,” he said. “There’s always questions.”

While Shumak said the new statements are likely to cause more confusion for clients, it will also raise their awareness of costs.

“It’s creating the potential for [them to ask], ‘Brian, what is this?’” he said. “Right now in the industry, there are, unfortunately, a large number of advisors who are not going to necessarily be working in the client’s best interest. And that’s where this disclosure and raising the question may be helpful.”

Savage noted the industry learned some valuable lessons from CRM2, a dealer reporting requirement that mandated similar annual disclosures about the costs and performance of mutual funds.

“Regulators found that CRM2’s fee disclosures were too complicated for many clients to understand,” he said. “Unlike CRM2, TCR also seeks to harmonize practices across the insurance and securities industries, ensuring consistency in the reporting of costs for segregated funds and mutual funds/ETFs.”

Fees focus

Shumak said despite a wider industry focus on fees, it’s not something that clients are preoccupied with. (He’s sold mutual funds in the past and describes himself as product agnostic.)

“Most clients that I’ve worked with really aren’t as concerned about fees as people think they should be. … I’ve had less than 10 individuals ever ask me about the fees,” he said, adding those 10 have all been in the last year and a half.

“The focus should be on the net rate of return after fees,” rather than solely on low fees, he said.

Advisors get questions about costs from clients, Savage said, but they’re also looking for solid advice, especially in choppy markets.

“During times of market volatility and uncertainty, professional advice matters most. Clients concerned with volatility may be even more sensitive to costs, but advisors can offer strategies to help them navigate these challenging markets and still achieve their long-term financial goals. This is where the value of advice comes in,” he said.

“Over the last several years, there’s been more attention on segregated fund [management expense ratios) and fees. Advisors are already talking to their clients about the cost of investing, so it’s important to highlight the real value of advice, such as personalized financial planning, investment management and the complexities of estate and legacy planning.”