If you use a financial adviser or hold mutual funds, take a close look at your first statement of 2016. You should notice a few changes. On January 1, Client Relationship Model–Phase 2, known as CRM2 in finance circles, came into effect. This rule forces financial firms to break out the costs associated with an investment on the reports they send their clients. Those managing your money will also have to show whether a fund is subject to a deferred sales charge—a fee an investor pays if a fund is sold before a specific time—and what the penalty would be for selling early.
A client’s annual report will have even more detail, says Don Murray, chairman of the Manitoba Securities Commission (MSC) and vice-chairman of the Canadian Securities Administrators (CSA), which imposed CRM2 after four years of consultation. An investor will see confirmation of every trade, all the operating and transaction charges, account fees, planning fees, transfer fees, sales charge compensation and trailer commissions. “The investor will know exactly what they have paid on their account during the year and whom they paid it to,” he says.
Investment regulators in several countries have been cracking down on investment fees and disclosure since the last recession. The United Kingdom has gone so far as to ban mutual fund sales commissions and trailer fees. To date, Canadian regulators have been relatively timid, which could partly explain why investors here pay the highest fees in the developed world, according to Morningstar. It was the investment research firm’s 2011 report chastising Canada for its lavish fees that led the CSA to fight for more transparency around costs, says Murray, a lawyer who has been the MSC’s chairman since 1997.
Some firms already disclose fees, but most don’t. Up until now, a company didn’t have to list anything beyond how much the investor had in his or her account. While firms typically post a fund’s annualized returns on their websites, many investors don’t have the time or the know-how to look for the details. The new rules force all companies to spell out clients’ individual costs and returns.
Of course, this only helps people if they read their statements, says Murray, and now there will be more to read. Assuming clients do read them, though, CRM2 could have a significant impact on the mutual fund business. “If investors feel like they’re not getting value for what they’re paying, there could be downward pressure [on fees],” Murray says.
Advisers will have to better demonstrate their value too. Now clients will know just how much they get paid. If, say, that compensation exceeds their clients’ investment return, then they’ll have some explaining to do. “If someone has been paid more than what you’ve made, and you find that surprising, then you’ll have to make a decision as to whether you think that’s good value,” says Murray.
While the industry has embraced the new rules, says Murray, some participants will have to answer for their high costs. Many investors will be in for a shock—“there are still a lot of investors who aren’t even aware they are paying fees,” he says—but Murray thinks everyone ultimately will be better off. Too few Canadians save and invest as it is, at least partly because the process has been so intimidating. Transparency should increase trust and, eventually, participation in financial markets. “We’re all rowing the same boat,” he says.
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