New fee disclosure required for mutual funds, scholarship plans, and other securities

As of July 15, 2014, under the Client Relationship Model 2, several new requirements apply to advisors in how they deal with you.

What this means is that before accepting an order from you, your advisor must disclose the fees you’ll have to pay to buy or sell a security or a reasonable estimate of the fees.

For example, if you are buying a mutual fund security, your advisor should describe each of the following, and how they affect your investment:

  • the management fee
  • the sales charge or deferred sales charge and any other redemption fees or short-term trading fees
  • any trailing commission, or other embedded fees
  • any options regarding front-end loads
  • switch or change fees

If you are buying a mutual fund or other investment product to which deferred sales charges apply, your advisor must advise you that you may be required to pay a deferred sales charge on the subsequent sale and disclose the fee schedule that will apply.

In addition to this new disclosure about fees, the document that describes your relationship with your advisor’s firm must explain how performance benchmarks might be used to assess the performance of your investments and any options you have for benchmark information.

Before you buy a scholarship plan from a scholarship plan dealer, your advisor’s firm must explain in the relationship disclosure document if you or your children could lose your contributions, earnings or government contributions, if certain terms of the plan are not met.

There are some additional changes relating to purchases of debt securities that we will discuss in next week’s blog post.