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Mutual funds and scholarship plans

Mutual funds and scholarship plans advisors should ensure they have a strong knowledge of the financial products they offer, and therefore implement reasonable measures to understand the structure, features and risks of each fund they are authorized to recommend to clients.

The client’s level of knowledge about investment should always be taken into account when establishing the limits of these advisors’ duty to provide information.

The advisor must take reasonable measures to understand the mutual funds purchased or sold at the request of the client, as well as those they are promoting to make sure these are suitable for the client’s needs. This also includes the current funds in the client’s portfolio. The advisor must also have a sufficient understanding of other mutual funds so they can compare with other options. Understanding a fund includes its structure, features and risks as well as the initial and ongoing fees and their impact.

The advisor must also take reasonable steps to assess and understand the funds held by the client following a transfer or an operation carried out as per their instructions.

For advisors whose clients invest in model portfolios, the obligation to understand the product includes taking reasonable steps to understand the composition of these portfolios, their characteristics as well as their risks. The advisor must also determine the type of person for whom these are suitable.

Finally, the advisor must demonstrate which actions they have taken to ensure they thoroughly understands the funds they recommend to clients.

Mutual funds

Mutual funds, sometimes referred to as investment companies, are a type of investment fund.

Mutual funds are organized as trusts. Each investor, also referred to as a holder or shareholder, has a right of co-ownership to the fund’s assets, proportional to the number of shares they own. The entity that acts for the benefit of investors is the mutual fund’s trustee. It generally delegates part of its powers to a portfolio manager. Mutual funds may be registered as RRSPs, TFSAs or other registered plans. A mutual fund’s assets are managed by qualified professionals who buy and sell the shares, bonds, money market instruments and securities based on the investment policies established with regard to the fund.

The mutual fund investors’ earnings and losses are generated through investment income (Canadian dividends, foreign income or interest paid on the securities of the fund), or from capital gains or losses deriving from the sale of the mutual fund securities. As well, mutual funds are open-ended, i.e. new shares are issued each time a new investor joins the fund.

The fund manager selects the assets they invest in according to the fund’s objectives, for example:

  • Providing regular income
  • Protecting the invested capital
  • Growing capital in the long term

Returns may take the form of interests, capital gains (through the fund or at the time of the sale) or dividends. Mutual fund securities aren’t guaranteed and the risk depends on the assets the fund invests in.

When purchasing a mutual fund for their client, the advisor should provide them with adequate detail on the following topics.

General features of the pooled fund:

  • General features of the pooled fund: capital pooling, professional management
  • Pooled fund types: income, shares, balanced, etc. (risk, performance)
  • Features of the various registered plans (RRSP, RESP, LLP, HBP, LIF, TFSA, etc.)
  • Fund’s non-guaranteed income
  • Pooled fund that isn’t covered by deposit insurance
  • Any restriction on the possibility of liquidating or reselling the fund
  • Any limit as to the products or services offered such as exclusivity or availability
  • Purchase (front-end fee) and redemption fees (cost of selling units), management fees, administrative fees or corporate service fees
  • Impact of the fees on the performance of the investments
  • Tax consequences of pooled funds
  • Obligation to evaluate the suitability of the fund and that all recommendations take precedence over the client’s interests
  • Any benefit received or to be received by the advisor or the corporation from anyone other than the client, stemming from the purchase or ownership of the fund through them

POS Disclosure

In order to ensure that communications about accounts related to mutual funds remain transparent, advisors must send their clients information that is easy to understand, clear, and useful at the time the funds are purchased. This obligation is part of the Client-Advisor Relationship guidelines established by the Canadian Securities Administrators (CSA). They include:

  • informing the client, before a transaction, about payable fees for the purchase or sale of pooled fund securities in their account;
  • increasing the amount of detail to provide in confirmation notices;
  • offering the client a general explanation about how to use performance benchmarks to better assess returns on their investments.

Specifically, the advisor must provide their client with accurate and comprehensive information about the nature and amount of the actual costs which will be charged, and this is the case even before accepting the client’s pooled fund securities purchase or sale instructions. It is therefore in the best interest of the advisor to take this opportunity to thoroughly explain to their client the value of their professional services. Focusing on greater transparency in this regard will help strengthen the relationship of trust between the client and the advisor.

Fund Facts

Fund Facts is a document that contains key information, and the broker has the obligation to ensure the client has received a copy. Nevertheless, in certain cases, the broker may assign the responsibility of performing their obligation to the advisor.

The advisor who shares Fund Facts with the client should explain its content to them. This information – concise, accurate and in plain language – facilitates the client’s understanding. By providing explanations, the advisor fulfills their obligation to give the client access to various information on the recommended products, including risks, returns, suitability and fees.

Content

  • Brief overview of the fund
  • Securities in which the fund invests
  • The fund’s risks
  • The fund’s performance
  • Whom is the fund intended for
  • Purchasing costs
  • Management and operational costs (administration, management services, commissions to advisors, marketing, legal counsel fees, bank fees, etc.)
  • Management expense ratio (MER)
  • Incidentals
  • Right to cancel

Closing date

Fund facts must be sent to the client before the dealer accepts an instruction for the purchase of a security of a mutual fund, as this allows the client to review the information included before submitting the transaction request. The Canadian securities regulatory authorities do not impose strict deadlines for the delivery of Fund Facts. By before, we mean within a reasonable timeframe before the client’s instruction to purchase. However, it shouldn’t be provided too soon before the purchase in order to avoid giving the impression that providing the Fund Facts document is in no way related to the client’s fund purchase request.

How it should be Delivered

Delivery may take place in person, by mail, by fax, by email or through a hyperlink to the Fund Facts document. If emailed, each Fund Facts document must be attached separately (not grouped together with other content in a single document) to ensure the client understands that each fund has its own Fund Facts. As well, each hyperlink provided by email by the dealer should link to one Fund Facts document.

Subsequent purchase

The advisor doesn’t have to provide new Fund Facts to a client who is purchasing shares in a fund from a specific category or series of securities they have already purchased, unless a more recent version of this document has been submitted. The advisor should therefore ensure they have sent the client the latest version of the Fund Facts document.

This obligation doesn’t completely exclude the use of simplified prospectuses, which will need to be supplied to clients upon request.

It is reasonable to believe that a well-informed client will make better decisions when they choose to request a fund purchase and, to that effect, Fund Facts play a crucial role.

Best Practices

  • The advisor should not take for granted that their clients don’t take an active interest in building their portfolio. If they don’t immediately show their interest, with time and under the educational influence of their advisor, they could acquire the taste.
  • The advisor must review Fund Facts with the client, taking the time to explain the main sections and drawing their attention to the most important components, such as the fund composition, past returns, risk level, fees and compensation.
  • It’s in the best interest of the advisor to have at hand, in hard copy or digital format, the latest Fund Facts for each fund they recommend on a regular basis.

Report on fees and compensation

This report is usually included in the annual statement, which the mutual fund dealer sends to clients. It specifies the amounts received by the dealer over the previous year, and not those paid to the advisor, for the provision of services to this particular client. The report includes:

  • Administrative expenses (processing transactions, preparing account statements, product review, etc.);
  • Consultant services (advisor know-how, establishment, regular review and rebalancing of the portfolio, meetings, account monitoring, fees and trailing commissions for the mutual fund of the client this dealer is associated with;
  • Protecting the client (overseeing and reviewing accounts regularly, assessing the relevance of transactions, etc.).

Annual performance report

This report is also sent to clients annually through the mutual fund dealer. It includes the client’s investment return rate over the last year, by taking the following information into account: dates when the client made deposits or withdrawals, dividends, accrued interest and capital gains or losses.

It may also contain a general explanation of benchmarks, which are included in the clients’ statements for information purposes only, to help them understand a fund’s performance for a given period. Benchmarks do not however take into account the deposits and withdrawals made by the client, nor the unique composition of their portfolio. Therefore, two clients with identical portfolios could get different yield rates. So, these benchmarks cannot serve as appropriate comparative elements in relation to the return rate obtained by the client.

The advisor plays an important role with clients, helping them put into perspective the information that appears on their statements with regard to returns.

Prospectus – Non-mandatory delivery

Before putting mutual fund shares on the market, an issuer must usually provide a prospectus for the securities regulatory authority. This document states risks related to investing in the mutual fund, fees and investment objectives. It should help investors understand this information and make informed decisions regarding investments. The prospectus – or simplified prospectus – doesn’t need to be delivered to the client before the mutual fund application, unless the client requests it. That said,

delivering this document is a good practice since it provides the client with all the relevant information about the fund in which they are getting ready to invest.

VRSP

The Voluntary Retirement Savings Plan (VRSP), which came into effect on July 1st, 2014, is the equivalent of the federal government’s and other provinces’ and territories’ Pooled Registered Pension Plan (PRPP). Québec, with its VRSP, is however the only Canadian province to have made joining mandatory for certain employers which meet the criteria listed in the Voluntary Retirement Savings Plan Act and its regulations.

The VRSP’s objective is to facilitate access to a retirement plan for Quebecers. It is a special group product because it may not only be offered to individual investors but to employers on behalf of their employees as well, in order to help them save for retirement. A VRSP may only be established and operated by a life insurer, a trust company or an investment fund manager.

The VRSP that is operated by a trust company or an investment fund manager may be offered to an employer or an individual investor, in particular through mutual fund representatives, who must first ensure they know their client well to determine if this product is appropriate to their situation.

Registered Education Savings Plan (RESP)

Several conditions apply to the RESP application and operation, depending on the type of plan that is joined and the selected sponsor. It is therefore crucial for the mutual fund representative to thoroughly explain the RESP terms and conditions to their client to help them make an informed decision and meet the plan’s eligibility requirements.

Advisors should provide comprehensive, accurate information about the RESP’s terms and conditions, including:

  • Plan type: individual, family or group
  • Minimum investment
  • Contribution limit
  • Maximum duration of the plan
  • Who can act as a subscriber
  • Who can become a plan beneficiary
  • How does one change beneficiaries
  • Applicable conditions of the Canada Education Savings Grant (CESG)
  • Applicable conditions of the Canada Learning Bond (CLB)
  • Tax treatment of the plan
  • Recognized educational institutions
  • Terms and conditions related to Educational Assistance Payment (EAP)
  • What happens if the child does not continue their postsecondary education (Accumulated Income Payment or AIP)
  • Applicable enrollment fees depending on the issuer
  • Withdrawal or cancellation fees depending on the issuer
  • Available investments
  • Risks associated with the investments

Based on the benefits offered by RESPs and the favorable treatment they receive from the governments, these plans may be an interesting tool for your clients in the achievement of their children’s goals, as long as all terms and conditions are well grasped