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CRM2: A New Age of Enlightenment for Investors?

Imagine a time when everyday citizens were oppressed and deceived by a select few institutions of authority. They were told how to think, how to act, and what was best for them. But after years of suffering, new ideas began to emerge based on science, reason, and scepticism that challenged authority and helped reform society. These ideas and beliefs spread quickly, cultivated by an increase in literacy and a departure from solely institution-based writings of the past.

Unlike the citizens of 17th-century Western Europe, Canadian investors have yet to experience their Age of Enlightenment. The financial services industry pushes its doctrine – expensive mutual funds – down investors’ throats by using salespeople masquerading as financial advisors to sell products that are “suitable” but may not be in the best interest of their clients.

Canadians pay the highest mutual fund fees in the world – costs that are hidden and rolled up into a percentage that many investors simply don’t understand. The average investor spends just an hour or two a year with their advisor and is unaware that an advisor is not required to act in their best interest. Investors don’t hear about lower cost funds, index funds, or ETFs, nor have they ever received an account statement that shows how their portfolio was doing – an annual rate of return that’s compared against an appropriate benchmark. They don’t even know how their advisor is paid.

CRM2

But the tide may finally be turning. Effective July 15, 2016, new disclosure requirements will shed light on fees and performance through a regulatory initiative known as Client Relationship Model, phase 2 – or CRM2.

The impact of CRM2 means that, for the first time, retail investors will begin to understand exactly how their investments are doing and exactly how much they are paying.

Related: Are investors willing to pay up-front for advice?

Investors will receive two new annual documents. The first is a report that shows investment returns for the previous year, the past three-, five and ten-year periods, and since the account was opened. The second report will disclose fees and other charges – itemizing the cost of everything from embedded trailer commissions, to redemption fees, switch fees, and RRSP administration fees, and provide a total dollar figure for the year.

How might an investor react to these new statements? Consider this hypothetical account of an ordinary investor named Marci when she opens up her account statement next December:

“That 2.18 percent MER didn’t sound like a lot at the time, but Marci was shocked to discover that the fees on her $80,000 RRSP account added up to $1,744 this year. Of that, $800 went to Marci’s advisor, Bill, which was odd because she thought Bill’s advice came free.”

Bill had always explained how well her fund has performed over the years, returning an impressive 7.33 percent annually over the last three years. But it turns out that Marci’s “Green Bank Canadian equity fund” actually trailed its benchmark by 2.68 percent over that three-year period.”

Final thoughts

The Age of Enlightenment took place between 1650 and 1800 and began a period in which cultural and intellectual forces challenged the deep-rooted authority of church and state.

While the investment industry clings to its old traditional model, a new era is about to transform the landscape for Canadian investors. Transparency and disclosure will lead to investors asking more questions and researching better options. The industry will be forced to adapt, through technology and innovation, to serve the needs of the newly informed public.

CRM2 is just the beginning. Next up, regulators will take a closer at banning embedded trailing commissions and separating advice from product sales. Then, perhaps a long overdue change from the inferior suitability – Know Your Client – standard to a fiduciary duty of care for investors.

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12 Comments

  1. Barry @ Moneywehave on March 9, 2015 at 8:25 am

    I was very excited about these changes but I’m worried that the banks/advisors will find some loophole to explain why their fees are so high and their performance is so low.

    That being said, I do like the idea that advisors can’t lie and say they don’t make any money from their clients.

    • Echo on March 9, 2015 at 9:23 am

      The one area which is not affected by CRM2 is the insurance industry and so expect to see more segregated funds sold to unsuspecting clients.

    • Richard on March 13, 2015 at 9:03 am

      Choosing a different benchmark is an easy way to mask underperformance. I’m not sure how much freedom there will be for financial service companies to do this but they have a great record so far in finding some way to look good even when they aren’t. They might also be able to find a way to avoid disclosing some fees by entering into contracts that reduce the returns and provide them with an indirect benefit (and then find a benchmark that makes those lower returns seem high).

      Overall it’s great to see the added disclosure. Until now it’s taken years of study to understand the industry well enough just to figure out the costs that investors are paying.

  2. Gary on March 9, 2015 at 8:54 am

    WHOA Robb! Why not until July 2016? Is this to give unnamed companies time to covered their greedy butts?

    • Echo on March 9, 2015 at 9:24 am

      Hi Gary, the industry dragged its feet saying it would take a long time to implement these new changes. I agree, it does buy them time to find loopholes.

  3. Fee-based advisor on March 9, 2015 at 10:25 am

    I am excited to see these come into practice. I have seen a number of “advisors” leave their MFDA license behind to go insurance only so they can still DSC. I have never DSC’s nor will I ever, there is no benefit to the client. where’s the fiduciary standard? I think this CRM2 will squeeze the low-end advisor and small shops out of the game, clients will move towards the bank channel and the HNW invetors will seek out ICPM’s who have been diclsoing fees costs and performance for all these years. YAY to CRM2

    • Robert on March 10, 2015 at 1:23 am

      I’m sure you said something useful here but all the TLA’s and FLA’s rendered it meaningless for some of us.

  4. DivGuy on March 9, 2015 at 10:27 am

    About time! But what Canadians need more is education towards finance and investing! I still don’t get why it is not taught to our kids… I do the job on my part but many parents don’t have a clue about it…

  5. Beric on March 9, 2015 at 1:32 pm

    This is well overdue!

    I’d also love to see us (the social masses) take on the financial media that continues to diminish us with tales of our financial illiteracy, touting the latest under-performing, high-MER mutual fund. Social media justice is so quick to rip anyone that may have had a disagreeable thought, yet the Financial Industrial Complex and its media gets away with robbery with impunity.

    “Monday’s gain was caused by a mix of reversing geopolitical instability, shifting uncertainty patterns, a risk-on atmosphere, and a perfect storm of beta meeting sigma.”

  6. Tawcan on March 9, 2015 at 1:50 pm

    Long overdue. Great to see this change.

  7. Paul N on March 23, 2015 at 10:37 pm

    This is definitely having an effect. I can attest to this with a 5 year battle with my HR at work. Fees have gone from over 2% down to 7/10ths of 1% for our seg funds GPP. This just happened. The fund company belittled my efforts from day one. Finally some satisfaction for me. We recently had three competative quotes all with lower fees and with the right answers to questions. No more BS in a suit. They are worried. I can tell you there is now competition out there. All you bloggers out there who took up this cause over the past years should be proud! It’s finally having a definitive effect.

    • Echo on March 24, 2015 at 8:51 am

      Hi Paul, good on you for fighting the good fight in the workplace – if your fellow employees understood what you did for them they would certainly appreciate your effort.

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