PETER DOLEZAL: A new reporting standard for financial services

A new client disclosure requirement, known as CRM2, is now the mandatory disclosure standard for Canada’s Financial Services industry.

It’s about time.

A new client disclosure requirement, known as CRM2, is now the mandatory disclosure standard for Canada’s Financial Services industry. Although it took effect on July 15, the industry has until year-end to achieve full compliance. It is unlikely that all investors will see the full benefit until January 2017, when they receive their 2016 year-end statement.

Long overdue, this change is a major step forward in empowering the investor with the information necessary to understand the full impact of all fees charged on each investment account, and to have a more meaningful insight into long-term portfolio performance.

What information can investors expect to see as of next January? Future statements will clearly show the dollar amount (Trailing Commission) paid annually to an adviser. For example, should the adviser personally earn $5,000 annually in Trailing Commissions from a client’s aggregate portfolios, the investor will now be able to better evaluate whether this cost is justified by the work performed and the portfolio’s performance.

Unfortunately, this new model retains a major flaw. If an investor holds mutual funds, he/she will now see the Trailing Commission paid to the adviser (often around one per cent), but will not see the balance of the Management Expense Ratio (MER) which can amount to another 1.5 per cent or more. CRM2 requires only that Trailing Commissions be clearly disclosed in statements, but not other costs associated with mutual funds.

In Canada, mutual fund MER costs average 2.3 per cent, but can range as high as 3.5 per cent. The onus will remain with the investor to check the Fund Facts information sheet on each mutual fund, to ascertain the total holding cost.

If an investor holds a ‘fee-based’ account on which a specific percentage is charged based on the account’s overall value (usually 1 to 1.5 per cent), the cost of such charges, including any embedded trailer fees, will also be reported in clear dollar terms.

A second major initiative in CRM2 will be the requirement that much more detailed information be provided on the historical performance of each investment account.

Although some firms have already been providing meaningful information on personalized annual rates-of-return since inception of an account, most have not. Now, a common standard will apply to this most vital statistic.

Most firms report year-to-date, one-year, and sometimes, five-year annualized rates-of- return; but few have shown the average annual return since an account’s inception.

How a portfolio performs in one year or even over a few years is interesting, but not particularly useful in reaching long-term comparative-performance conclusions.

If, for example, in next January’s statement, an investor were to learn that the account has averaged a total annual return of perhaps 4.5 per cent over the 18 years the account has existed, that is most helpful. That information can be used to compare the account’s performance against that of Canadian, U.S. and International Indexes over a similar time frame.

Despite some remaining deficiencies in CRM2, it represents a major step forward for investors.

Many will be surprised, and perhaps even shocked, at the amounts earned by their adviser. This new knowledge is likely to accelerate the already existing transition from mutual funds to much lower-cost Index Funds and Exchange Traded Funds (ETFs). This trend will likely also see a significant exodus of advisers, as often occurs with realtors when the real estate industry experiences a market softening.

Other reporting changes are included in CRM2; the above however, are the most significant, and useful, to investors.

What is important now, is for each investor to study the new reports, understand them, and apply the information as a sound basis for future investment decisions.

Our regulators have still not gone as far as other developed nations in protecting the investor. Some countries have altogether eliminated the use of Trailer Fees.

This issue continues to be debated in Canada, with the Investment industry lobbying hard against its future adoption.

 

A retired corporate executive, enjoying post-retirement as an independent Financial Consultant (www.dolezalconsultants.ca), Peter Dolezal is the author of three books, including his recent Second Edition of The SMART CANADIAN WEALTH-BUILDER.

 

Contact Panorama Rec Centre to register for Peter’s Elder College Fall session – Financial & Investment Planning for Retirees & Near-Retirees (Wednesday mornings; October 5 to November 2).

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