Disclosures: Key to Investor Trust and Regulatory Compliance

5.4 Disclosures

So, let me start by sharing a quick story. A few years ago, I was working with a client who was super excited to invest in a new product—some fancy structured note that promised interesting returns. The client had a vision for retirement, a vision that depended on stable growth. But guess what? The product came with a rather complicated fee structure (I’m talking multiple layers of commissions, performance fees, and underlying product costs) that even I found a bit overwhelming, and I was the one trying to explain it! As I walked this client through each fee, I realized how essential it is to clearly disclose every cost, every possible conflict, and every risk. After all, you never want your client feeling like they’ve been blindsided by something that should’ve been spelled out from the start, right?

That’s what this entire section is about: effectively communicating those must-know details so that clients can make informed decisions. Here, we’re diving deep into disclosures. This includes fees, commissions, conflicts of interest, and the straightforward language needed to ensure compliance with Canadian securities regulations—particularly under the evolving regulatory environment governed by the Canadian Securities Administrators (CSA) and enforced by the Canadian Investment Regulatory Organization (CIRO).

Remember: On January 1, 2023, the Mutual Fund Dealers Association of Canada (MFDA) and the Investment Industry Regulatory Organization of Canada (IIROC) amalgamated, forming CIRO. So if you ever see references to MFDA or IIROC, know that in 2025 these are considered defunct predecessors. CIRO is now your single point of reference as Canada’s self-regulatory body overseeing dealers and marketplaces. And of course, the Canadian Investor Protection Fund (CIPF) is the sole investor protection fund, stepping in to protect client assets if a member firm becomes insolvent. Anyway, enough background—let’s jump in.

The Heart of Disclosure

“Disclosure” in the securities industry means providing investors with the information they need to make well-informed decisions about their finances. It’s as simple as that, and as powerful. If your client is left in the dark about fees or potential conflicts of interest, how can they trust your advice, or your firm?

Too often, we talk about disclosure as though it’s just legal boilerplate in an account application or that single paragraph you glance over in a product fact sheet. But in reality, proper disclosure is about fairness, trust, transparency, and accountability. So let’s break down the big areas requiring robust and clear disclosures.

Why Disclosures Matter for Client Protection

Ask yourself: have you ever found yourself in a store, about to buy an electronic device, only to learn at checkout that there’s a mandatory service fee or an extended warranty cost not mentioned on the shelf label? Frustrating, right? Now multiply that frustration by about a thousand for investors, who might be putting their life savings, or their kids’ education funds, or their retirement nest egg, on the line.

Disclosures matter because: • They build trust. Clients sense honesty when everything is spelled out up front.
• They reduce disputes. When clients know what to expect, they’re less likely to say, “Wait, you never told me about that fee!”
• They foster long-term relationships. Sticking to a high disclosure standard not only protects the client but also protects you, the advisor or the firm.
• They align with regulators’ expectations. The CSA Client Focused Reforms set clear professional obligations, ensuring advisors act in the client’s best interests.

Key Areas That Require Detailed Disclosure

Below are some essential areas where advisors must provide disclosures. The list is broad, but not exhaustive:

• Fees and Charges
• Commissions and Trailing Commissions
• Conflicts of Interest (both potential and actual)
• Investment Strategies and Risks
• Relationship Disclosure Information (RDI)
• Suitability and KYC disclosures (see also Chapter 6.1 on Suitability of Investments and Chapter 5.2 on the New Account Application Form)

In certain cases, you might even have to provide frequent updates or ongoing disclosures. Let’s explore each in more detail.

Fees and Charges

Clients have every right to understand how their money is being used and how much of it might be going toward administration, advice, management, or other services. Whether you’re dealing with commissions, transaction fees, or trailing commissions hidden in mutual fund MERs (Management Expense Ratios), these must be stated clearly in plain language. No ifs, ands, or buts.

Some advisors like to bury fees in footnotes. I get it—maybe you’re worried the client will balk if you emphasize the cost. But trust me (from personal experience!), it’s far better to have that open dialogue early on than to have the client discover those fees later and lose confidence in you. In Canada, the CSA has hammered home the importance of disclosing not only what fees are charged, but also how, and how often.

Commissions and Trailing Commissions

For those who sell mutual funds, there’s this concept of trailer fees or trailing commissions—ongoing commissions paid to the firm or advisor out of the management fee for as long as the client holds certain investments. If you fail to disclose to the client that they’re effectively paying for ongoing advice (or receiving some intangible service they might not even be aware of), you step into a regulatory landmine.

Under the Client Focused Reforms, if you receive trailing commissions—or any compensation from product manufacturers or third parties—that needs to be clearly outlined to the client. Not only the existence of such fees, but also any potential conflict this might create. Because if your compensation structure influences your recommendations, that’s a conflict you must bring to the client’s attention.

Conflicts of Interest

Sometimes you might be working at a firm that underwrites or distributes a certain product. If you earn extra compensation for steering your client toward that product, that’s a conflict of interest. If you have a personal stake in a company or if your spouse works at a company whose securities you’re recommending, that’s another conflict.

The key is to disclose these conflicts immediately and explain how you manage or mitigate them. For instance, maybe your firm has a robust compliance policy that ensures all recommendations must go through a third-party review process when you have a personal stake. Or maybe your firm, in alignment with the CSA reforms, requires that any conflicts be addressed in favor of the client’s best interest. So, don’t be silent about it.

By the way, here’s the official definition we use:
Conflict of Interest: A situation where an advisor’s personal or financial interests may interfere with their duty to act in the client’s best interests.

Investment Strategies and Risks

Investment products can be complicated. If you’re recommending a leveraged strategy, exotic derivative, or something that has a heavy correlation to a certain commodity, guess what? The client has to know. If the risk is high or the liquidity is uncertain, the client should not, under any circumstances, remain in the dark. This is not only a best practice but also a regulatory requirement.

Disclosing the nature and the extent of risk helps the client weigh the potential upside against the potential downside. If you just say, “Hey, this product is perfect, no worries,” you’re effectively setting yourself up for trouble if markets go south. Instead, highlight everything from volatility, credit risk, and interest rate risk, to currency or foreign exchange risk if applicable.

Relationship Disclosure Information (RDI)

If you recall from earlier sections in Chapter 4 and Chapter 5.1 on Opening Accounts, Relationship Disclosure Information is often the first formal introduction a client has to your practice or your firm. This document outlines the advisor-client relationship, the services offered, the responsibilities of both sides, potential conflicts, and how the firm handles them. The RDI should be updated if there’s any material change in your business model, ownership structure, or the level of services you offer.

Timely and Plain Language

The timing of disclosures can be just as important as their actual content. Proper disclosure needs to happen at or before certain critical moments—like account opening or the recommendation of a new product. Disclosing something after your client has already invested is basically shutting the barn door after the horse is long gone.

And let’s not forget about language. The average investor may not have a background in finance, so using complicated jargon or piling on technical terms can create confusion. Our mandate is to use plain, understandable language so that the critical points aren’t lost. If your client can’t easily comprehend the fees, conflicts, or risks, can they really give informed consent to proceed?

Documenting and Keeping Records

Remember reading about Client Records in Chapter 5.5? That’s super relevant here. Once disclosures are made, it’s absolutely crucial to document them. This not only creates a paper trail in case of conflict or misunderstanding, but it also helps you, the advisor, keep track of what was disclosed and when. If you rely on verbal disclosure alone and the client later says, “You never told me that,” you’ll be hard-pressed to prove otherwise.

Many firms store disclosure records electronically. Key takeaway: ensure everything’s timestamped, then double-check that you have a system for verifying those disclosures with the client. E-signatures or digitally signed forms work well, but confirm you’re following your firm’s policies and CIRO guidelines.

Managing and Mitigating Conflicts of Interest

Let’s do a quick deep dive into conflicts of interest, because these can be major pitfalls if not handled properly. According to the CSA Client Focused Reforms (you can read up about them at CSA Client Focused Reforms), advisors must either avoid conflicts of interest outright or address them in a way that puts the client’s interest first.

Here are some strategies to manage or mitigate conflicts:

• Organizational Barriers: Firms often implement “Chinese walls” (essentially info barriers) between departments to stop insider or biased information from leaking.
• Independent Oversight: Sometimes, an external compliance officer or a designated supervisor reviews transactions that could be conflicted.
• Compensation Transparency: If you’re receiving extra compensation (like finder’s fees, trailer fees, or referral fees), be crystal clear about how that compensation is structured.
• Education and Training: Ongoing training for advisors and staff ensures that conflict-of-interest situations are recognized and addressed expeditiously.

In each case, the client should walk away fully informed. If they have any lingering doubt or confusion, that might mean your disclosure wasn’t thorough or clear enough.

The Role of the CSA Client Focused Reforms

We keep mentioning these reforms because they alter many aspects of how advisor-client relationships operate in Canada. In short, the reforms:

• Clarify that advisors must act in their clients’ best interests (i.e., put the client first).
• Strengthen KYC (Know Your Client), KYP (Know Your Product), and suitability rules.
• Require heightened transparency around fees, compensation, and conflicts.
• Mandate additional disclosures when changes occur in the advisor-client relationship.

These reforms aren’t just bureaucratic red tape. They’re designed to regain and retain investor trust, which might have been eroded over the years by a handful of bad apples or by opaque industry practices. Advisors who embrace these reforms typically benefit from stronger client relationships, fewer disputes, and robust compliance.

By the way, if you’d like a deeper dive, check out the Additional Resources at the end of this chapter, including the CSA Client Focused Reforms webpage and the CSI’s own online course on “Conflicts of Interest and Disclosure Obligations.”

Real-World Illustration: The Leveraged Investment Dilemma

Let’s consider a scenario that might crop up in a typical brokerage environment. Suppose you have a client—let’s call them Alex—who’s eager to maximize returns. Alex is open to leveraging their home equity line of credit to invest in a new high-growth fund recommended by your firm.

• Potential Conflict: Your firm is the primary underwriter of this fund, meaning you earn a higher commission if you sell it.
• Required Disclosures:

1. The fund’s prospectus or offering memorandum detailing its strategy, costs, and risks.
2. All fees: the load fee, trailer fee, management expense ratio, and potential performance fee.
3. The fact that you (the advisor) might earn more selling this fund than a competitor’s product that’s substantially similar.
4. The high-risk nature of leveraging borrowed funds, including the risk of losing more than Alex’s initial investment.

By systematically explaining each of these points, you’re not only fulfilling your regulatory obligation but also giving Alex the opportunity to decide if this strategy aligns with their risk tolerance (something addressed in Chapter 5.2 and Chapter 6.1 on suitability). That’s the true spirit of disclosure.

Best Practices for Effective Disclosure

• Use Summaries and Bullet Points: Dense paragraphs can be intimidating. Summaries help break up the text.
• Provide Written Documentation: Hand the client a copy or email them an electronic version of all disclosures.
• Confirm Client Understanding: It’s one thing to provide the information, but it’s also crucial to check that the client genuinely grasps what you’ve told them.
• Update Regularly: If fees change or if your firm reworks its compensation structure, deliver an updated disclosure promptly.
• Keep the Tone Matter-of-Fact: You don’t want to alarm clients unnecessarily, but you also don’t want to sugarcoat potential hazards. Strive for a balanced message.

Common Pitfalls and How to Avoid Them

Despite best efforts, sometimes disclosures are overlooked or incomplete. Here are some pitfalls:

• Relying on Website Footnotes Alone: Digital disclaimers might be too hidden or too vague.
• Using Legalese: Overcomplicating language can obscure meaning.
• Timing Issues: Providing a key disclosure after the client has already committed is ineffective.
• Neglecting Documentation: Failing to record or save proof that a disclosure was made is a major compliance risk.
• Not Revisiting Conflicts: Conflicts can evolve over time. Revisit them periodically, especially when new products or relationships are introduced.

Regulatory and Compliance Oversight

CIRO (the Canadian Investment Regulatory Organization) actively monitors and enforces disclosure requirements among its member firms. It establishes rules to ensure that dealers and advisors meet these obligations. In serious disclosure breaches, advisors can face fines, suspensions, or permanent bans from the industry. Meanwhile, the CSA sets overarching rules and coordinates enforcement with provincial regulators.

Firms also have dedicated compliance departments. You’ll often find that these internal compliance units run audits to check for compliance with disclosure obligations under cross-references like IIROC Rule references or MFDA references—though remember, MFDA and IIROC are defunct as of 2025, and their consolidations are now part of CIRO’s consolidated rulebook. The bottom line: if you’re ever unsure about whether or how to disclose something, consult your compliance folks. It’s better to ask in advance than to face a possible enforcement action down the line.

Evolving Regulation: Ongoing Reviews

Regulations in the securities industry aren’t static. They evolve—often rapidly—to address new products, emerging technologies, and shifting market dynamics. For instance, the rise of cryptocurrency-based products brought forth new disclosure obligations around digital asset custody, valuation, and risk. Similarly, online robo-advisors triggered the need for clearer digital disclosures around algorithms and rebalancing methodologies.

Firms should have a regular review process for their disclosure materials. This might involve forming a small working group of compliance, legal, advisors, and even marketing folks to check that everything remains up to date, user-friendly, and aligned with the CSA Client Focused Reforms. If you want to remain in good standing, you can’t afford to just “set it and forget it.”

Diagram: The Disclosure Process Flow

Here’s a simplified Mermaid.js diagram showing how disclosures typically flow in an advisory setting:

    graph LR
	    A["Advisor <br/>(Collects KYC Info)"] --> B["Identify Potential Conflicts <br/> & Fees"]
	    B["Identify Potential Conflicts <br/> & Fees"] --> C["Draft Disclosure <br/> Materials"]
	    C["Draft Disclosure <br/> Materials"] --> D["Present to Client <br/>(Plain Language)"]
	    D["Present to Client <br/>(Plain Language)"] --> E["Client Confirmation <br/>& Documentation"]
	    E["Client Confirmation <br/>& Documentation"] --> F["Ongoing Review <br/>& Updates"]

• A: The advisor collects KYC (Know Your Client) info, bounding the context for the type of product or strategy.
• B: Potential conflicts, fees, and relevant charges are identified.
• C: Disclosure materials (e.g., documents, forms, disclaimers) are created or updated.
• D: These materials and explanations are presented to the client in clear, plain language.
• E: The client confirms understanding, and the advisor documents the process.
• F: The advisor and firm commit to routine updates and reviews to maintain compliance.

This cycle repeats throughout the client-advisor relationship, especially when major changes occur or new products are recommended. So it’s not a one-and-done deal.

Table: Key Components of Fee Disclosures

Below is a simplified table showing some fee types you might need to disclose, along with their description and typical timing:

Notice how the timing column emphasizes the need to disclose the fees before or at the point of sale (or at account opening, if it’s an ongoing fee). Late disclosure is almost as bad as no disclosure at all.

Keeping It Real: Common Sense vs. Regulatory Overkill

Sometimes you might feel, “Are we over-disclosing? Clients don’t even read half the disclaimers we give them.” But here’s the thing: clients who do read the disclaimers—or at least want that information accessible—will feel more comfortable knowing you’re transparent. Even if the majority of folks gloss over the text, the mere fact that you’re ready and willing to provide it fosters trust.

I often read disclaimers and think, “Wow, I wish I’d known this when I first started investing in my twenties.” So from a purely practical standpoint, there’s no such thing as over-communicating in financial services. Just keep it relevant and clearly worded.

Final Thoughts and Encouragement

Disclosures are the bedrock of trust between clients and advisors. You can have the smartest portfolio strategy in the world, but if your client is worried you’re hiding something or is confused about how much you’re earning off their investments, you won’t maintain that relationship for long. By making clear, accurate, timely disclosures in every aspect—from fees to conflicts to risk factors—you help ensure that your clients are fully engaged partners in the investment journey.

Sure, it can be a bit tedious. And yes, you might have to occasionally muster extra patience to re-explain certain items in everyday language. But remember, every time you do that, you’re building credibility. In an era where trust in the financial world can be fragile, taking these extra steps is what sets top-notch advisors and ethical firms apart.

That’s it for “5.4 Disclosures.” But if you want more info on how disclosures tie into the entire account-opening process, check out Section 5.1 on Opening Accounts and Section 5.5 on Client Records. And if you’re curious about how disclosures factor into product recommendations and client suitability, you’ll want to read Chapter 6 on Product Due Diligence and Suitability. It all connects, so keep building your knowledge and you’ll be unstoppable (in a good way)!

Glossary Highlight

• Conflict of Interest: A situation where an advisor’s personal or financial interests may interfere with their duty to act in the client’s best interests.
• CSA Client Focused Reforms: Regulatory amendments designed to enhance investor protection by clarifying and strengthening the obligations of advisors and firms.

Additional Resources

• CSA Client Focused Reforms
• Online Course: “Conflicts of Interest and Disclosure Obligations,” Canadian Securities Institute (CSI)
• CIRO: https://www.ciro.ca for up-to-date rules and guidance

Test Your Knowledge: Must-Know Disclosures for Canadian Advisors Quiz