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Client Relationship Model (CRM2)

Providing investors with greater transparency about the cost and performance of their accounts is the driving force behind new industry-wide regulations, known as the Client Relationship Model II (CRM2). Many investors want to know how CRM2 will affect them.

Definition of 'CRM2'

CRM2 refers to new rules around the reports and disclosures made by Canadian investment dealers and advisors. The new rules are part of the second round of reforms to the client-relationship model by the Canadian Securities Administrators (CSA), the umbrella organization that harmonizes regulation across Canada’s provinces and territories. The two new disclosures under CRM2 are: a clearer account performance report using standard measurement periods and an itemized annual list of fees and other costs charged to the account. CRM2 is meant to create greater transparency for Canadian investors by giving them a clear look at their account performance and what they pay to get that performance (or lack of). The CRM2 rule changes took place in different phases, with full implementation in early 2017.

What is CRM2?

  • New industry-wide regulations that improve how the financial industry reports and discloses information to investors
  • Changes have now been implemented across the industry as of early 2017. It includes two new reports: (1) account costs and (2) account performance.
  • Applies to all investment dealers and advisors in Canada, including:
    • Investment dealers regulated by the Investment Industry Regulatory Organization of Canada (IIROC)
    • Firms regulated by the Mutual Fund Dealers Association (MFDA), such as the respective mutual fund distributor of each of the major banks
    • Investment counselling firms regulated by provincial securities commissions in Canada

Breaking Down 'CRM2'

One of the most interesting changes under CRM2 is the presentation of fees in terms of dollars paid rather than as percentages. Although there is no mathematical difference between the two styles, seeing fees in dollars for the first time — particularly if the accounts have not performed well — may cause sticker shock for some Canadian investors. On top of seeing costs in dollar terms, the return on the account is reported using a money-weighted rate of return to provide a more personal view of an investor's progress towards his or her financial goals.

Why Has CRM2 Been Implemented?

  • CRM2 is part of a global shift towards increased disclosure and transparency in the investment industry
  • To provide investors more details on the fees and performance of their investment accounts
  • To improve investors' ability to assess how they are progressing towards their financial goals

What CRM2 Means for Advisors

With fees being made explicit in dollar terms, Canadian investment advisors need to show they provide value for the money. There could potentially be quite a few Canadian investors who start looking at lower-cost options like robo-advisors and passively managed portfolios. There is, of course, also an opportunity for high performing advisors to use CRM2 as a way to attract clients from poor performing competitors. Simply put, if an advisor isn’t providing value for the dollar, then CRM2 is bad news.

What CRM2 Means for Investors

Canadian investors already had the ability to figure out performance and costs on their own, but it was a longer and more complex process than needed. CRM2 does the work on calculating direct and indirect costs, as well as standardizing performance reporting, making it easier to evaluate the value an investor receives from his or her advisor. The ease of evaluation opens the door for comparison shopping when looking for investment advice, giving the investor the advantage of a more informed choice between the options.

How Will CRM2 Affect You?

  • CRM2 does not change the amount you pay the dealer firm; it only provides more detail about your account fees and performance.
  • All investors are receiving more specific details on the cost and performance of their investments via:
    • A summary of costs over the previous 12 months associated with the management of your portfolio
    • An Investment Performance Report to provide details on how the account is performing using a "money-weighted" rate of return
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