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Advisors game for CRM2 rules, but want gaps filled


Date: May 20, 2016

It’s the day many advisors have been anticipating for a while: On July 15, a new era of disclosure is coming to Canada’s financial services industry.

As part of the next phase of regulatory initiatives – some new rules were introduced in 2014 and 2015, but the biggest changes are coming this year – Canada’s securities regulators are set to implement new reporting known as the Client Relationship Model - Phase 2, or CRM2.

The new set of rules will require dealers and advisors to provide investors with a full and meaningful disclosure of fees and commissions and more information on how their investments are performing. These changes are meant to empower Canadian investors and buttress their faith in the country’s financial services industry.

Once implemented, investment brokers and dealers will be required to provide two additional documents. One is the individualized annual investment performance report that shows money deposited into and withdrawn from the client’s account. It will also provide a fund’s percentage return over various periods, including since the time the client started to invest. The other new report will show the dollar value of charges and other compensation the dealer or advisor was paid for on the products and services provided throughout the year.

It could be a full-year before the impact of the first CRM2-comliant statement can be measured, but Debra Foubert, director, compliance and registrant regulation, Ontario Securities Commission (OSC), says she has realistic expectations for the new rules.

“While it won't make investors instant experts, CRM2 will play an important role in increasing investors' understanding of their portfolios, their progress towards their investment goals and the factors that influence those outcomes,” she says. “More informed investors will achieve better overall results.”

The OSC, she adds, is working with the investment industry to ensure the new reports will be delivered on schedule. Since the new rules comes into effect in July, and dealers have a year to start sending these reports, most clients will start getting 2016 details in 2017.

Fee disclosure has long been a contentious issue in an industry increasingly under pressure to do a better job of demonstrating the value of advice provided to investors.

“It would appear some advisors were not properly disclosing how, and how much, they were getting paid, and clients did not know if they were making or losing money,” says Clay Gillespie, a financial advisor at Rogers Group Financial, in Vancouver, B.C.

That said, the investment advisor community appears generally on board with the required changes. Cory Papineau, a Winnipeg-based financial advisor says he has been detailing an approximate dollar cost for his clients for the last couple of years.

“Being out in front is the best strategy that we can have,” he says. “Anything that makes a client more engaged in their financial well being is a big positive for me as their advisor because I truly believe that their knowledge helps me improve my ability to provide them with the best advice for their situation.”

If the changes are incorporated as part of the Know Your Client (KYC) and sales processes, their integration becomes seamless, adds Mr. Papineau.

Mr. Gillespie recommends advisors take a proactive approach to disclosure rules.

“If they are smart, they are letting clients know the new reporting is coming and they’re spending time clarifying their service offerings so clients know what they are paying for,” he says.

Mr. Papineau says that showing value and greater cost transparency is a good thing since as industry transitions to more fee-based accounts. However, compensation disclosures could give investors a little sticker shock and that could have implications for both advisors and clients, a PwC study finds.

If investors fail to see value provided for the fees and charges, they may decide to go it alone without professional advice, notes the report. Not only will that be detrimental to investors’ financial well being, it could make survival even more difficult for some advisors.

“Research suggests that some of the smaller advisors may be pushed from the industry forcing some of their clients to try and do it themselves or get what they can from the teller at their local bank,” says Mr. Gillespie. “In addition, many firms might not find it profitable to service smaller clients with the increased cost associated with the new regulatory rules.”

It’s also important to note that the new rules only deal with the security side of things. It’s still not clear as to how to apply CRM2 principles to such investments as segregated funds, annuities and GICs that fall outside the scope of securities legislation. There’s some concern that this could potentially create regulatory arbitrage making some advisors to push investments other than securities, segregated funds, for instance, not covered by the CRM2 umbrella.

Ms. Foubert assures that the regulators are not done yet. She says there will be proposals to fine-tune some technical aspects of CRM2. For now, advisors need to demonstrate their value and give clients all of the information they need to make better decisions.

“We encourage registrants to provide their clients with information that meets the CRM2 standards with respect to all of their investments,” she said.

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