The heavy lifting

“It is really the upcoming phase of CRM2 that will require a heavy reliance on technology, as opposed to the phases that have been put in place so far,” Strulovitch says. “The next phase of CRM2 is significant and will impact everyone, even those using technological solutions previously.”

From a technology perspective, most of the heavy lifting will come with the regulations that take effect in 2016, particularly in the areas of performance and compensation reporting. These requirements will cause companies the most headaches in adapting computing and information architectures to fit the new requirements.

Most firms will follow one of three approaches: go it alone using in-house technology; outsource all functions to a third-party supplier; or use a hybrid approach marrying the two. The third option appears to be the most popular.

“In practice, [the best strategy] is probably a combination of both approaches: in-house and third-party solutions,” says David Mastroberardino, product director at Montreal-based Croesus Finansoft Inc., which provides information-technology products to financial services firms.

Being part of a much larger firm helps. Assante Wealth Management (Canada) Ltd., part of Toronto-based CI Financial Corp., has adapted most of its in-house technology to fulfil CRM2 requirements by using third-party solutions providers to plug any gaps.

The most challenging part of that process for Assante was the development and testing of the new performance reports, which are a major component of the 2016 CRM2 requirements. “As part of this, we have had to incorporate a new method of calculating returns: the money-weighted method,” says Robert Dorrell, senior vice president of distribution services for Assante.

Historically, dealers reported the performance of their assets under management using a time-based reporting method, which eliminates the effect of cash flows. A dollar-weighted return is far more complex, as it takes cash flows into consideration.

“You need all the information on a particular investment – how much was invested and on what day – and all the contributions and withdrawals that have occurred over time,” notes Michael Stanley, president and CEO of London, Ont.-based mutual fund dealer Quadrus Investment Services Ltd., who sits on the board of the Investment Funds Institute of Canada. Dollar-weighted performance reporting differs from time-weighted performance reporting, in which a single rate of return over the past 12 months can be used, he adds.

The increased complexity of calculating dollar-weighted returns requires more computing power, requiring a solid performance engine to help to calculate those returns. The new performance reporting requirements also create challenges for data quality. Richard Binnendyk, executive vice president of enterprise wealth management with Toronto-based financial services technology provider Univeris Corp., warns that this complexity will be one of the most challenging aspects of using software to meet CRM2 requirements.

“[Data quality] encompasses many elements, from ensuring accurate presentation of book cost and market value to ensuring that the transaction activity is complete and accurate in order to support correct performance reporting,” he says.

Dealers can expect some errors in their reports, especially early on in the implementation of CRM2. If a dealer transfers a security into an account for a client, and the security doesn’t have a market value, then the contribution – from a performance perspective – will appear to be zero. The dealer then must use other approved methods to establish a value and correct the initial value of that contribution for the report on the investment performance.

“There often are times in which there is an obscure security that the dealer hasn’t had to deal with,” explains Paul Strijckers, vice president of business solutions with Toronto-based Broadridge Financial Solutions Inc., which provides record-keeping software for Investment Industry Regulatory Organization of Canada (IIROC) and MFDA dealers.

This issue is not likely to arise often for MFDA dealers, but could present problems for IIROC dealers, Strijckers warns, because the latter may have to deal with private placements and over-the-counter securities for which market values may not be readily available.

This complication, along with human errors such as incorrectly entered transaction codes, is likely to mean dealers’ employees will have to go manually through a list of transactions for which the initial value appears to be zero.

Aside from being a time-consuming and complex operation, this error handling and mop-up activity can present scheduling problems for dealers due to the timing of the reports. The new annual performance and compensation reports must be produced within 10 days of the date of a client’s quarterly statement, but a lot of the necessary number crunching for the reports will be based on the final client statement data, warns Sean O’Donovan, executive vice president of products and customer delivery at Markham, Ont.-based Doxim Inc. In March, his firm, which provides statement design for the financial services sector, teamed up with Broadridge to help serve client firms’ CRM2 needs.

“If [a firm has] 100,000 clients and you have to send out a document to them that heretofore wasn’t part of your obligation, that’s a significant cost. There’s a lot of work that we’re doing to aggregate those reports so that they can go out in the same envelope,” O’Donovan says.

Automation, therefore, is a key part of the CRM2 process, argues Eric Rocks, vice president and managing director for the Canadian region at Windsor, Conn.-based financial technology solutions provider Securities Software & Consulting Inc. (known as SS&C Technologies). “Automation is an area that either directly feeds or takes from your bottom line. Spending time to thoughtfully develop an automation regime around CRM2 will pay benefits over time and allow your firm to decrease labour costs,” he says.

If done correctly, using technology to fulfil CRM2 requirements could even present business-building opportunities for dealers, which may be able to include custom messages and calls for client action in the performance reports that dealers now must provide, targeting clients with specific recommendations based on their profile data.

These considerations also apply to the dealer compensation reports that will become mandatory in 2016. These statements will include dealer compensation information that may be new to clients, including aggregated fees for management, cheque and wire charges, and trustee fees that will be rolled up into annual numbers.

This information also presents technological challenges, because data must be retrieved from multiple sources, says Binnendyk: “Items such as referral fees and rebates to clients add to the complexity of how technology will consolidate these into a single client report.”

How easily dealers manage all of this complexity will depend largely on how well their existing systems are structured, says Greg Leroux, co-founder of CRM2Plus, a division of Toronto-based ESCTT Inc., which provides financial analysis software to help certified financial planners meet the new reporting requirements. Dealers that have maintained consolidated databases of client transactions will find implementing CRM2 easier, Leroux says, especially if those firms have been collecting comprehensive data for a considerable time.

For example, Windsor, Ont.-based Sterling Mutuals Inc. uses a proprietary system for back-end records management, explains Joanne Caruna, the firm’s vice president of operations: “Adding performance information to client statements was simply a matter of taking what was already available on the portal and adding it to the statement layout. The key to doing something like this, however, was that your data had to be reliable in the first place.”

Other firms with more fragmented systems will face challenges. “[Those firms] may have had several record-keeping systems in use over the past 20 years, so consolidating all of the information to comply with CRM2 isn’t trivial,” says Leroux. “An ‘out of the box’ technological solution is impossible, and some customized software will have to be built.”

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