The question of meaningful, professional disclosure can be addressed in a number of ways. The most obvious way is to comply with the letter of the regulation. As such, product manufacturers need to make clear disclosures in their prospectuses and offering memoranda, inlcuding what their products cost and any associated permutations, such as taxes, performance bonuses and additional service fees.
Another way that one might look at disclosure is to apply the Golden Rule as it relates to the financial services industry. Essentially, that means advisors should disclose unto others as they would like others to disclose unto them. That might well mean that their disclosure involves not only (for instance) what a product costs, but also what the impact of that cost would be on a portfolio of a certain size over a certain timeframe, ceteris paribus.
At issue here might be the notion of materiality. The directive from IIROC (Rule 29.7) says that industry participants are to disclose all material facts pertaining to products and services. When I asked an IIROC manager of Business Conduct Compliance to de- fine the standard more precisely, she said: “Materiality is well de- fined in several places. We expect members to be professionals, able to apply rules reasonably.”
Given this response – every answer is a response, but not every response is an answer – it seems our esteemed securities SRO is quite happy to offer general guidance regarding where the line might be drawn on industry matters without ever specifically drawing a line at all. Different firms, in turn, take it upon themselves to draw different lines regarding disclosures, disclaimers and such. The perspective they bring to the table will inform their individual corporate policies and procedures regarding product disclosures and practice disclaimers, among other things. In short, the same marketing piece might involve different disclosures at different firms governed by the same regulatory framework.
Perhaps that’s no big deal in your eyes. What if the same firm required different disclosures for different advisors using the same material? After all, if there’s no uniformity between firms (a macro question) is it a big deal if there’s no uniformity within firms (a micro question), either? Now, the question of materiality morphs into a question of consistency and fairness.
If you’re buying an appliance, you’ll see it comes with a sticker that shows not only how much energy it consumes, but also how much it consumes relative to other appliances one might purchase. As such, government bodies have decided that it is important that consumers can determine not only the absolute quantum of usage, but also the comparative quantum of usage. It seems giving consumers only absolute (but not comparative) information might inhibit them from making a responsible self-interested choice. To date, disclosure has revolved around what costs are rather than what they mean for investors.
I think it would be constructive to have the industry include comparative data – how much does this Canadian equity mutual fund cost compared to the universe of Canadian equity mutual funds? I also think an impact disclosure is clearly material, even if IIROC (or the MFDA for that matter) doesn’t force the industry to connect the dots. For instance, $10,000 invested at 10% over 10 years yields a total value of $25,937.43. That same product would generate a final value of $20,610.32 after accounting for a 2.5% MER (assuming no difference in precost performance). In my view, that kind of “impact disclosure” of fact is material. It’s also something that professionals can easily apply in a reasonable manner that would help consumers make a truly informed decision.