CRM2 or in the plain language – investor sticker shock

You wouldn’t overpay for pizza or beers on a Friday night would you?  That’s because you know what you want and exactly what you’re paying for.

The same cannot be said for millions of Canadians when it comes to investing advice – until now.

Under new regulations that came into effect on July 15, 2016, investment firms now must provide personalized accountings to clients about the costs and performance of their investments.  To borrow some words from Tom Bradley, President of Steadyhand Investment Funds on this subject recently, when it comes to investing advice:  get ready for the age of enlightenment.

Beginning July 15, 2016, firms now must:

  • “provide an annual report on charges and other compensation that shows, in dollars, what the dealer or adviser was paid for the products and services it provided; and
  • provide an annual investment performance report that covers
  • deposits into, and withdrawals from, the client’s account;
  • the change in value of the account; and
  • the percentage returns for the previous year; and the previous three, five and ten years.”

That’s great stuff for many Canadians who don’t have a clue about the costs and performance of their investments.

I can back-up these claims based on a recent Tangerine study.

This study found that while most Canadians (89%) consider themselves knowledgeable about their investments; many are unaware of the fees they are paying to invest.  From the survey:  thirty six per cent claimed they don’t pay any fees at all and another 11 per cent were unsure if they pay fees.

The survey stats get even worse.

When the survey narrowed in on the 67 per cent of investors who use a financial advisor, 24 per cent of those surveyed said they don’t pay fees or commissions for their advisor’s services, and another 13 per cent were unsure. Furthermore, of those who were aware of fees for their advisor’s services, when asked how well they understood the fee structure, nearly 40 per cent said “not very well” or “not at all.”

Canadians have historically paid (and many still pay) some of the highest mutual fund fees in the world.  I recently wrote about this and my journey out of high priced fund products that killed my portfolio.  That doesn’t happen anymore.  Hopefully, this second phase of Canadian Securities Administrators’ requirements, under a series of reforms called the Client Relationship Model (CRM) will bring about more transparency and disclosure across the financial industry.

Here are three things to know about CRM2 changes:

  1. You’ll know the exact dollar amounts you’re paying to your investment dealer. Once a year, your investment dealer will send you a report summarizing compensation earned such as trailing commission(s), in actual dollars. This report will also provide a summary of your out-of-pocket charges like annual administration and transaction fees.
  2. You’ll get a more complete picture of your return on investment. Annually, you’ll receive a report that provides your personal portfolio performance for the previous year and since opening your account. Previously, firms only had to disclose the rate of return for the fund overall. This additional information will help you ensure your investments are aligned with your long-term goals.
  3. You may not see this information right away. It’s important to remember that although the new requirements described above are effective July 15, 2016, most firms will likely provide the two new annual reports on a calendar year basis. This means most investors will start getting their reports in early 2017.

Clarity in whatever industry you work in, is a good thing.  Bring it on for investors please.

What’s your take on CRM2?  Do you applaud this initiative or are you still in the dark about what this means?

Important reading and further review:

Rob Carrick – What new disclosure rules for advisory services mean for investors

Manulife – CRM – Phase 2

FAIR Canada videos – voiceover by investor advocate Preet Banerjee

20 Responses to "CRM2 or in the plain language – investor sticker shock"

  1. I have to raise my hand and say I do not know my total fees paid on the RRSP and LIRRSP accounts. They are steep but I’ve gotten some good advice over the years especially when I was younger and the internet was not invented yet. I’m not sure I’d be where I am today without that advice. Maybe, maybe not. In any event I am satisfied (so far) with the services I’ve used. On the TFSAs and RDSP I do it all myself so those only incur fees when I buy stocks.

  2. Cannew, my understanding there is no more waiting. As of July 15 the information for a minimum of the past year has been made available to people who use an advisor buying mutual funds, ETFs, stocks, bonds etc.

    1. RBull: Thanks. It would be interesting to get some feedback from people with portfolio’s of over $500k to see what their total fees amount to.

      1. Well, if a blended portfolio of say 3-4 plain-vanilla ETFs was costing 0.25% in money management fees (which isn’t too bad), that’s still what – about $1250 per year in fees on a $500k portfolio?

        I suspect my money management fees are about $400 max per year, and that includes the transaction costs to buy my stocks every year (since I’m in asset accumulation mode for the next 10-15 years) but I do own more stocks in terms of assets than ETFs.

        1. Reminds me of our condo. We have 400 light fixtures with two 15w lights in each. It was suggested that we should remove one light from each fixture, but the board said removing one light wouldn’t be much saving on 15w bulbs, which actually worked out to only 2 cents per day per bulb.
          But on removing one bulb from 400 fixtures at 2 cents per day worked out to $3,188 per year, an amount I think is worth the savings. S

          ame with those low etf fees. Not much on small investments but as the total grows so do the fees and they are ongoing.

          1. Interesting analogy and I see your point. I will always own a couple of ETFs (such as VTI) but more and more, I’m focused on growing my income for retirement in 10 years.

    2. I do believe there is some sort of transition period but for this calendar year, they must start, since requirements are now into effect. Don’t quote on that though. I would have to email CSA’s like OSC in Ontario.

  3. It’s been an active couple of years in the investment biz, with lots of advisors clamouring to sell as many seg funds as possible in order to sidestep the new rules; as well as many advisors choosing to call it a day.

    Are there compliance rules for the reporting format? Will be interesting to see if firms produce simple and clear reports or if they will find loopholes allowing them to obfuscate the client’s data with mountains of related but useless numbers and jargon.

    1. I’ve never been a fan of seg funds myself. I mean, I can see the appeal, but long-term why bother – especially with the fee structure for many of them?

      The CRM2 requirements seem clear but I don’t think the reporting format is standardized, likely far from it. It will be interesting to see if any smoke and mirrors work is done to continue to hoodwink investors – that wouldn’t be surprising but of course, very bad if it happens.

  4. I’m definitely all for this. I’ve been fortunate that my current advisor have already been doing this for years as he always felt that his clients should be aware of what they are paying for, etc. He says that it helps him sleep at night knowing that he’s not ripping his clients off and that it also keeps him motivated to ensure that he always bring his client value based on the commissions that he receives and adjust it accordingly. He’s definitely one of the rare ones.

    1. Great to hear KC.

      Sounds like you have ‘one of the good ones’ – an advisor that is focused on the client and transparency. If he helps you, and that provides value, then don’t lose him.

  5. I feel left out as I don’t have any advisors or own any funds or etf’s which have fees. For those who do, you will have to wait for a year to get the answers and I wonder how many will want to change after that? But for some it should be enlightening.

    1. Well, I don’t have an advisor – hence the blog name.

      Most of my holdings are stocks. I have 3 ETFs and even then, they all cost less than 0.20% MER. It will take a few years for folks to realize the fees, and I wonder even then, some folks don’t give a shit 🙂

  6. This might be an eye opener for a lot of people. Once they see the kick backs (retrocessions) an advisor gets for selecting the best funds, some might be surprised.
    I have worked on an investing project. Part of the work included exactly that type of reporting. It is a legal obligation for some services already. Not all…

    Europe is actually thinking at banning these kick backs and have the people pay for the advise. I am curious to see what that will bring.

    The more transparency, the better!

    1. “Europe is actually thinking at banning these kick backs and have the people pay for the advise. I am curious to see what that will bring.”

      Interesting! Thanks for sharing.


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