By Karin Mizgala, Co-founder and CEO Money Coaches Canada
Choosing a focus word for the year ahead has become a popular New Year’s activity. Words like flourish and balance are trendy, unless you work in the financial services industry, where the word on everyone’s lips in 2017 will be transparency. Starting this year Canadian investors will receive two new reports: one will clear the fog around the cost of investment advice; the other will provide shareholders essential information on how well their investments have performed.
These new reports are required by the Canadian Securities Administrators (CSA) as phase 2 of the Client Relationship Model, or CRM2. We think these changes have been far too long in the making, and find it a bit shocking that the industry needed mandating to provide such basic information as fees charged for advice and how effective that advice was in generating investment returns. The good news is the change has finally come.
CRM2 went into effect in July 2016 but most people won’t see their first reports until early this year. You may be astonished or confused by what you read, especially if you haven’t had much contact or service from your advisor.
This article will provide a brief overview of what to expect in each report and explain what we at Money Coaches Canada believe are the strengths of CRM2 and how we think it could have been even stronger. But more important are our suggestions for turning this information into a tool for you to better understand and assess your investments.
Two New Reports
Going forward, every Canadian investor will receive two new account-based reports, delivered together, covering the same 12 month period:
- Report on Charges and Other Compensation
- Report on Investment Performance
Report on Charges and Other Compensation
Simply put, this report will list all the fees and charges incurred in your account. This would include everything from administration fees, transfer or account closing fees, short term trading fees, transaction or sales charges and redemption fees. Essentially any cost associated with maintaining and using your account.
Advisors must also be transparent about compensation received from third-parties, including referral fees, success fees (fees paid on the completion of a transaction) or finder’s fees. They must also disclose any trailing commissions along with an explanation of what trailing commissions are (a trailing commission is usually 0.1% to 1% of a client’s investment paid annually by an investment management company to the financial advisor for their ongoing service and advice to the client – this fee may be a surprise to investors who don’t receive much ongoing service after their initial investment).
Report on Investment Performance
Along with your report on charges and other compensation you will receive an annual investment performance report detailing how well your investments are doing. Performance will be disclosed using three standard measures: opening market value, change in market value and personal rate of return.
- Opening market value clarifies what the investment was worth on the day of the transaction. It will also include the opening market value of deposits, transfers and withdrawals.
- Change in market value reflects the annual change to the value of your investments and the change in market value since you opened the account. Your advisor should be able to provide information as to what caused the change.
- Personal rate of return provides an annualized total percentage return after deductions for charges and fees. It will be provided for the previous year, since you opened your account and up to the previous three, five and ten years where data is available.
What We Like About CRM2
There are many positive features of CRM2. Here are some of the things we like best:
Disclosure: When it comes to your finances, more information is always better. While we think openness can go even further, CRM2 is definitely a step in the right direction for Canadian investors.
Personal rate of return: All advisors will be calculating the personal rate of return using the same money-weighted method, which will make this information consistent from one advisor or dealer to the next. This method factors in the impact of deposits and withdrawals from your account and allows you to better gauge your progress towards your goals.
Cost in dollars: Under CRM2, the fees and charges you incur will be listed in dollars and percentages. Having the actual dollar amount in black and white is often much more revealing than reading those same costs as percentages of the entire portfolio.
Starting a dialogue: Many Canadians will be surprised by what they read on the CRM2 reports and have serious questions for their advisors. This new transparency may leave some advisors struggling to provide satisfying answers.
Where we believe CRM2 falls short
It isn’t that there are negatives to CRM2; it’s more that we feel CRM2 would be even stronger if it addressed some of these issues:
Frustration: While pulling back the curtain on investment fees and returns is a positive move, many investors may feel informed but not empowered to do anything with this information.
Not the full fee picture: Despite the many steps forward, the CRM2 report on charges and other compensation does not include the Management Expense Ratio (MER), which means Canadians with investments in Mutual Funds still won’t have a complete snapshot of what those investments cost.
Trust: To be fully informed investors, we believe it’s essential that Canadians understand how their advisors are being compensated for the advice they provide. While the declaration of trailing commissions is a great start, more is needed to unmask potential conflicts of interest in advisors’ recommendations.
Context: An investment performance report is useful to gauge your progress year to year, but without a relevant external benchmark, (such as the performance of the underlying market) to compare to, it’s very difficult to evaluate the quality of the advice you are receiving.
How to Turn CRM2 Reports into a Financial Tool
You can expect to receive the two new reports early this year. Don’t be tempted to put them aside until later, the information they contain is long overdue, read them carefully, then:
- Determine exactly how much you are paying in fees. The report will not include any MER fees, so if you have mutual funds you will need to find that information on the fund ‘fact sheet’ for each mutual fund you own.
- Ask your advisor to give context to your return on investment report, by providing you with comparative benchmarks.
- Consider having an independent investment professional provide a fresh perspective on your investments.
Unless your investments are greatly surpassing the relevant benchmarks or your advisor is giving you superlative service, your fees should not exceed 1.5% of your investments. Paying even 1% point more than you need to, on a $250K portfolio, can equate to a great deal of money ($2,500 a year, or $50,000 over a 20-year period), that is NOT being invested on your behalf to benefit your retirement, but will instead benefit your investment advisor in his or her retirement.
CRM2 was established because the Canadian Securities Administrators believe that Canadians have the right to know where their dollars go when they purchase investments. Money Coaches Canada believes that too.
We also believe Canadians deserve financial advice free from the conflict of interest inherent in the traditional financial advice model —the “free” advice offered by those who sell products can never be free from the fact that where and how much you invest affects your advisor’s paycheque. A Money Coaches Canada Money Coach will charge you an upfront fee for professional advice that is always free of bias and personal gain.
The information you will be receiving this year in your CRM2 reports, coupled with a complete, unbiased review of your finances and investments, is the best investment you can make in your financial future. A Money Coaches Canada Coach is the perfect ally to help you interpret the reports, make sure you are clear about what you are invested in, and help you determine whether it’s a good fit for your goals. We can help you save money and make sure that you are not being taken advantage of.