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Understanding Your Investment Costs

The investment industry in Canada is governed by The Investment Industry Regulatory Organization of Canada or IIROC. A new regulatory requirement took effect that is referred to as the IIROC Client Relationship Model, or CRM. CRM has four main concepts: Relationship Disclosure, Conflicts of Interest Disclosure, Enhanced Suitability and Account Cost & Performance Reporting.

“Your Annual Account Reports” which were recently sent to you are a regulatory requirement from IIROC related to account cost and performance reporting. This report is intended to provide clients with a relative perspective on the fees they have paid over the course of one “calendar year”.

We have found that the majority of these reports show a percentage that is different than what you have agreed to with Verus Financial. We have outlined some examples of how and why the report you received will be different so you have peace of mind that the fee you have agreed to with Verus is the same that is being applied to your accounts.

1. Why does the percentage of fees paid on my January 1, 2016 – December 31, 2016 report differ from the fees agreed to in my account fee agreement?
In most cases the fee will not match exactly what has been agreed to in your account fee agreement. This can occur for the following reasons:

<   Sales Tax: The Investment Program Fee reflected on “Your Annual Fees” report includes HST / GST. The fee identified in your account fee agreement does not include taxes.

<   Timing of Payments: “Your Annual Fees” report covers a calendar year period, and fees paid in that period. For example, the fees that accrue on your account for the period from October 2015 through December 2015 (Q4) would have been calculated based on the Average Market Value of your account during that same period. However, the fee for Q4 2015 is charged to your account in January 2016. Any changes in market value or withdrawals/deposits in January 2016 could skew the percentage calculation.

Example:

Using the above example of timing, if your account had an average market value of $1 MM in Q4 2015 and was charged a fee of 2%, the fee for the fourth quarter 2015 would have been $5,000. This amount would be charged in January 2016 (Q1) and captured on “Your Annual Fees” report for 2016.

If you then withdrew $300,000 in January 2016, and no further deposits or withdrawals were made during the year (assuming no change in market value), the average market value for 2016 would be $700,000. The 2% fee charged for Q1, Q2 and Q3 would be $3,500 per month. The fee for Q4 2016 is not included in the 2016 report, as it was not paid until January 2017.

The fees as a percentage of market value would then be $5,000 + $3,500 + $3,500 + $3,500 = $15,500. After tax of 5% (GST), the amount charged to account is $16,275. As a percentage, the fees will be reflected as $16,275/ $700,000 = 2.33%.

Vice versa, if you deposited $300,000 in January 2016, the average market value for 2016 would be $1,300,000. The 2% fee charged for Q1, Q2 and Q3 would be $6,500 per month. The fees as a percentage of market value would then be $5,000 + $6,500 + $6,500 + $6,500 = $24,500. After tax of 5% (GST), the amount charged to account is $25,725. As a percentage, the fees will be reflected as $25,725/ $1,300,000 = 1.98%.

2. How is the average market value calculated?
The average market value on the report is calculated by adding together the end of month market value over the 12-month period from January to December, and dividing by 12. It is important to keep in mind withdrawals and deposits have a significant impact on your average market value, which will ultimately affect your fee percentage.

3. Why are taxes (e.g. provincial and federal sales tax) included in the report?
The regulatory requirements specifically state that we report all charges and fees incurred by the client, including any fees that may be passed through to a third party. This includes provincial and federal taxes.

4. Why, in some cases, is the market value on the report different than the Market Value on the client account statement?
Market values reported on account statements are reported in the currency that the securities are held. Account statements do not report a total market value in a single currency. In order to reflect a total market value for an account on this report, there is a notional conversion of all other currencies into one single currency.

5. What report should I give my accountant now?
As in past years you will continue to receive an Annual Fee Summary directly from Verus which clients have typically provided to their accountant. We would suggest that you continue to do that, but as always please check with your accountant to confirm the tax treatment of your investment fees.

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