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Disclosure: what’s all the Fuss About?

June 26, 2014 | Smarten Up Institute

The (un)expected impacts of CRM2

Disclosure; the word brings to one’s mind thoughts of clandestine events or the latest celebrity ‘tell all’ scandal. Apply that thinking to the regulatory amendments from the Canadian Securities Administrators (CSA) regarding Client Relationship Model Phase 2 (CRM2) and one has images of shocked investors feeling betrayed by their investment advisors as they learn what it really costs to invest.

At a high level, the concept of providing the investing public with full transparency and improving the fee and performance information available sounds simple. Investors should be able to ‘see’ if they are achieving their investment goals and how much it is costing them to meet that objective – in an easy, presentable format. However, in talking with industry experts, they suggest that things are not so straightforward at the advisor level.

Let’s Talk about Your Portfolio

In the past clients and advisors could have a friendly chat about the clients’ investment portfolio. This has changed. From a compliance perspective, the advisor now has to prove the conversation happened.
There is still the notion that these conversations can be verbal, but the reality is that it takes us into the nasty territory of recorded conversations and the resulting privacy concerns.

In actual practice, information about an investing clients’ portfolio will likely mean more paperwork for the advisor and their client. As Pat Dunwoody, Executive Director at Canadian ETF Association, stated advisors “have to start collecting the information anyway, so why not start collecting it on your (the advisor’s) form and get your client to sign it.”

Additionally, they will have to update their forms to comply with the Foreign Account Tax Compliance Act (FATCA) and Canada's Anti-Spam Legislation (CASL).

Value of Keeping an Advisor in Business

There is a lot of talk in the industry about conveying to clients the value of advice. Advice is the obvious service that advisors provide.

What is less obvious are the costs associated with providing that advice: office space; telephone; technology; training; and compliance; including the support staff necessary in maintaining this service.

Sandra Kegie, President of Kegie Consulting Corp., states “the challenge will be when the client looks at exactly what they are paying for when they purchase a mutual fund and determining whether or not the product is worth the charges”. The critical question that remains when the client is shopping around and comparing dealers is whether they will factor in the “value of keeping that advisor in business”.

A study by the Australian Securities & Investments Commission in 2010 determined that there “is a significant disconnect between the amount consumers are willing to pay for financial advice and the typical costs to licensees of providing financial advice.”1 The difference was quite significant. On average the cost of providing advice was $2,500 to $3,500 whereas consumers were only willing to pay $300.2 If the Australian study is applicable to the Canadian marketplace as an example of consumer trends then dealers have some real marketing challenges ahead.

Question of Interpretation

The aim of the new regulation is to provide clarity for the client, but, will it achieve that goal?
Confusion will undoubtedly be an unintended result. As Dunwoody says:

You cannot make people understand. You can show them the information and you can walk them through it but that doesn’t necessarily make them understand…. it’s a step in the right direction.  Going from a percentage to a dollar figure on costs may help them understand,  because I don’t know if they could fully grasp what a 2% management fee translates to. However, seeing the dollar figure for fees may cause some unexpected reactions.”

I think over the next few years they will be overwhelmed compared to a generation ago when all clients received was one yearly statement. Now they are going to get a statement, with a detailed explanation of the calculation, plus a sheet with the costs — all good information, but it will be a lot for a client to absorb. Will it be easy for a client to understand if they have monthly transactions? Is the value of my account going up because I am making a monthly contribution or because my investment is performing well? Cost versus growth.

The challenges are many. There is no standardized method of reporting across the board. Firms may not share historic information when a client transfers from one firm to another, so the portfolio holdings will appear with a proper book value. Some product providers are not able to provide detailed breakdowns for certain products that the dealers can incorporate into their reporting. As well, under this new legislation, a client statement has to include non-CSA products (for example, insurance products).  However, product providers for Segregated Funds do not fall under CSA jurisdiction. The dealers now have the challenge of getting the information from the product providers to add to their statements but the providers are under no obligation to provide that information.

A provider that sells life insurance and mutual funds will hand their client one piece of paper for the life insurance policy and a booklet for the mutual fund. As Kegie said:

Your advisor is going to open this booklet of information and say to the client “Ok, now we have to go through this” and you are just going to look at him and say “seriously, I am busy and I need to get out of here”. Most people are going to nod and smile because they are thinking of picking up their kids from day care and say “listen…just show me where to sign”. People only have a certain amount of tolerance for information.

I am not sure that it (the CRM2 legislation) will have as much of a positive impact as regulators want it to have.  I hope it does, but time will tell.

Changing Landscape

As the regulation comes into effect, dealers are coping with the costs of retooling their software and processes and training their advisors to ensure compliance.

Some dealers are using back office providers who cannot retool their software anymore. These dealers may be forced to convert to a different, likely more expensive, provider. Other dealers may be looking to merge with another provider to share costs.

We can speculate all we want that it will drive investors to the banks, especially the smaller investors who many people argue need the investment advice the most” said Kegie, “and that it will drive the MFDA (Mutual Fund Dealers Association) member numbers down. It is not just CRM2 changes that are plaguing them; they have CASL, and FATCA. They have had to change their forms (to include all the different laws coming into effect) and have had to deal with a lot of other industry issues coming at dealers. They are struggling to stay in business.

Clients will shop around for less expensive products and dealers. Some dealers may decide that smaller accounts are not viable and those clients may feel they get better value for their investment at their bank. Some dealers may go to a fee for service model.

Also, what clients invest in may change over the next few years. For example, customers may start to see Exchange Traded Funds as a less expensive and more viable product. Existing products may be retooled as providers figure out ways of lowering costs.

According to Kegie one of the most positive changes coming from these new regulations is the growing interaction between industry and the regulators which has produced valuable consultations and more inter-industry discussion.


The intent of the CRM2 regulation, to provide clarity for the investing public about the costs associated with their investments, is a step in the right direction. However, in practice, the onus is on the advisor to explain the various calculations and fees to their clients – including understanding the technical systems that drive the calculations.

Are the regulations beneficial to the client in the end if the advice needed to the investor is lost? Whether this “tell-all” approach results in a break-up or reconciliation between the client and their advisors will be determined in the next few years. Perhaps there will be a plot twist that has not been predicted? Stay tuned to see if dealers throw up the white flag, investors run to the banks, or small investors start putting money under their mattress.


1. REPORT 224: Access to financial advice in Australia (Australian Securities and Investments Commission: December 2010), 13. Available online,$file/rep224.pdf.
2. REPORT 224, 47.

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