The countdown is on for a new era of transparency for investors on the reporting of fees and performance by their financial-services providers. Under regulatory initiatives known as the Client Relationship Model, Phase 2 -- or CRM2 -- various new disclosure requirements will be phased in over the next few years.
"It's game on for transparency," said Bill Charles, a senior vice-president of Investors Group Financial Services Inc., during an Oct. 1 panel discussion on CRM2 at the annual Investment Funds Institute of Canada (IFIC) conference.
Effective July 15, 2016, investment brokers and dealers will be required to provide two new annual documents. One is an account-performance report, summarizing how investors did over various standard measurement periods. This report will require calculation of money-weighted rates of return, customized according to when new money was deposited or taken out of the account.
The other new required report, as of July 2016, will disclose fees and other charges. This report will itemize the cost of everything from embedded trailer-fee commissions, to redemption fees, point-of-sale commissions, switching fees and RRSP administration fees, and provide an aggregate dollar figure for the 12-month period.
Effective next year, as of July 15, 2015, greater disclosure will also be required of the current market values and book values of account holdings, and what the dealer is required to do if there is no market price available.
Though the investment industry is generally on board with CRM2, there's uncertainty over how it will affect advisor-client relationships, and no small amount of trepidation.
The biggest potential game-changer is greater transparency of fees, which could lead to sticker shock on the part of investors. Because of embedded commissions that fund companies pay directly to commissioned brokers and dealers, many investors don't know the extent to which they're paying for advice and service or mere order execution. As surveys have found, some investors don't have a clue.
The extent of any sticker shock will depend not only on the investor's knowledge level, but on the advisor's compensation model. Commission-based accounts will be the most affected. With fee-based accounts, a growing segment of the industry, there's greater transparency because advisory fees are paid directly by investors, not indirectly by fund companies.
Performance, which will be disclosed in a separate report, will also affect investor reaction. The worse the performance report looks, the tougher the questions that investors are likely to ask about fees.
Consider this scenario: It's January 2017, and the reports on investment performance and on fees and charges have just arrived in the mail, covering the 2016 calendar year. (The end dates of the first CRM2-mandated reports will vary, depending on the broker or dealer, but July 15, 2016, must fall within the reporting period.)
Let's assume for illustrative purposes that 2016 ended up being a down year for the equity markets, and that the investor's account has fallen sharply in value. At the same time, the report on fees and charges shows that the dealer and his firm collected thousands of dollars in revenue.
Though making money during periods when the client is losing money is normal industry practice, investment losses disclosed in the performance report and the drag on performance from fees could make for testy conversations. The advisors most likely to be grilled would be those who did little more over the course of the year than send holiday cards in December and solicit RRSP contributions in February.
Regardless of what market conditions will be three years from now, CRM2 is likely to lead some investors to dump their current advisors on the grounds that they're not getting their money's worth.
Greater transparency may prompt dissatisfied investors to seek lower-cost approaches to investing. Among them are fee-based advisors who employ low-fee indexing strategies. Other alternatives include technology-driven advice substitutes -- known as robo-advice -- offered through discount brokers.
"CRM2 will empower clients," said another IFIC panellist, Karen McGuinness of the Mutual Fund Dealers Association. "The real question is whether it empowers advisors," added McGuinness, the MFDA's senior vice-president responsible for member compliance.
Almost everyone in the investment industry, along with its watchdogs, agrees that advisors who don't provide good value to their clients had better start thinking about getting into another line of work.
Investors Group's Bill Charles, for one, says advisors must embrace CRM2 in a positive and pro-active way. Transparency helps everybody, he says, because it leads to longer relationships that are based on trust.
"We must be better communicators than we have ever been," says Charles, adding that advisors must demonstrate the value they bring by providing comprehensive financial planning and preventing investors from making big mistakes and sabotaging their retirement plans.
Panellists at the IFIC conference, including Carole Lynde, president and chief operating officer of Bridgehouse Asset Managers, emphasized the importance of investment-management firms and advice-givers working together to be prepared for when the CRM2 requirements take effect. Some advisors are thinking ahead and anticipating questions that their clients will ask, Lynde noted approvingly.
CRM2 has sparked a mini-industry on advisor education in the lead-up to the new era of transparency. Some examples:
- At the IFIC conference and at other venues, Dynamic Funds is distributing a question-and-answer document on various regulatory changes including CRM2. "The changes to the methods, timing and requirements for disclosure through CRM2 will change how advisors talk to their clients, what they talk to them about and when," the 24-page booklet says.
- Invesco Canada is presenting a program at its fall road shows entitled The Language of Fees: Finding opportunity in CRM II. Invesco says the sessions are based on new research and focus on "how advisors communicate with clients in the era of fee transparency."
- As part of the dealer kit provided at its road shows, Renaissance Investments reprinted a 2013 article, entitled Fee Transparency and You – Validating Your Trailer. Authored by Grant Shorten, director of strategic insights at Renaissance, the two-page article includes a list of 25 expenses, benefits and services that are provided to investors in return for all-inclusive trailer fees.
- Investment Executive, the newspaper and website publisher, sponsored a CRM2 educational seminar in Toronto on Oct. 8 that was well attended by investment advisors, fund managers and service providers. Among the presenters were PureFacts Financial Solutions and AUM Law, which jointly produced a 12-page document entitled CRM II: Cost Disclosure & Performance Reporting. It contains annotated sample reports that are an excellent resource for what will be required.
Here at Morningstar, we're holding panel discussions on CRM2 over the next several weeks in Toronto, Vancouver and Montreal, as part of our Executive Forum series for industry participants. Our panellists will include senior executives of fund-management and financial-advisory companies, and senior officials of the Investment Industry Regulatory Organization of Canada (IIROC). Stay tuned in the weeks and months to come for articles and video reports arising from these discussions, and our ongoing coverage of what CRM2 will mean to you.
