CRM2 and you

“CRM is an example of taking various elements of the standards we have around suitability, and saying, ‘Let’s make them stronger; let’s make them more robust’,” Susan Wolburgh Jenah, president and CEO of the Investment Industry Regulatory Organization of Canada (IIROC) told the audience at an event held in Toronto by the CFA Society Toronto in late April. “It’s about ensuring that when a client goes to an advisor … there is clarity in terms of what the expectations are.”

Although most players in the investment industry express support for the pursuit of increased clarity and transparency, CRM2 presents challenges, particularly for advisors. The reforms will force advisors to have difficult conversations with their clients about the performance of client accounts and the compensation that advisors receive.

“CRM2 is all-encompassing regarding the disclosure required by the advisor to the client,” says Paul Walker, financial advisor and CEO of Mississauga, Ont.-based IFS Global Technologies Inc. “It covers not only the relationship that has to be disclosed – how you intend to service this relationship; how you get paid – but [also] measuring and monitoring the performance of the investments.”

Although the prospect of discussing your paycheque with your clients may be unnerving, the conversations prompted by CRM2 needn’t be framed in a negative light. In fact, these discussions present an opportunity for you to highlight the value you’re bringing to the table.

“Ultimately, it’s about connecting with your client and making that opportunity to showcase what you’re offering,” says Ellen Lee, board member with the CFA Society Toronto. “If you’re putting your clients’ interests first, you’re serving them properly and you understand them properly, then that’s a big step toward making the conversation positive.”

With the first batch of CRM2 regulations set to take effect next month, it’s a good idea to start having these conversations sooner rather than later.

– Understanding the changes

There are three main requirements that must be met in time for the first CRM2 deadline, July 15, 2014:

1. provide clients with pre-trade disclosure of any charges and commissions associated with the purchase or sale of a fund or security, including trailer fees;

2. provide enhanced trade confirmation disclosure for debt securities, with commissions broken out separately;

3. provide, as a component of the relationship disclosure document, a general explanation of the ways your clients can use performance benchmarks to assess the performance of their investments.

Among these initial changes, the pre-trade disclosure requirement is likely to represent the most significant reform for advisors, according to Barbara Amsden, a director with the Investment Industry Association of Canada (IIAC). Although many clients may already realize that commissions and fees are associated with most transactions, others may be caught off guard. As a result, you may have some potentially lengthy meetings to explain to your clients how dealers and advisors get compensated for their work.

“That will be the biggest change,” Amsden says. “It will be an annoyance to some clients, and it may be a surprise to some clients. There will definitely be more time being spent there.”

The next set of CRM2 requirements, which take effect in July 2015, deal with client statements. Specifically, these statements will have to include new information about book value or original cost of each investment position and reflect a new definition of how to report market value. Dealers will be required to begin sending quarterly account statements for any securities held in a client’s name (a.k.a. “off-book” securities). Previously, some clients were receiving statements just once a year from the portfolio managers of the investment funds held in client-name accounts.

The final CRM2 deadline is in July 2016. This stage features one of the most contentious reforms: a requirement that clients begin receiving an annual report outlining all of the account charges and commissions they have paid over the course of the year. Also in 2016, firms will be required to begin sending clients an annual investment-performance report, including detailed information about market value and annualized returns.

Some of the details of the new requirements remain unclear. Specifically, the investment industry’s two self-regulatory organizations, IIROC and the Mutual Fund Dealers Association of Canada (MFDA), are still in the process of completing and implementing their own rules to conform with CRM2. While these rules must remain materially the same as those set by the Canadian Securities Administrators (CSA), IIROC’s and the MFDA’s rules could end up being somewhat different from the CSA’s version of the rules.

“Regulators themselves are actually slow to the party,” Walker says, “in terms of interpreting – even at a bare minimum – what the basic expectations will be. There’s lots of confusion.”

– Educate your clients

As you begin walking your clients through the many new disclosure requirements under CRM2, education will be key.

“It’s a good thing that we’re increasing transparency to the clients,” says Lise Dupont, vice president of business initiatives, wealth management division, at National Bank Financial Ltd. (NBF) in Montreal. “But at the same time, there is going to be a lot of education that we’ll need to do with the clients.”

Although none of the CRM2 reforms will result in any tangible changes to the services that clients receive or the level of fees they pay, the extensive new disclosure requirements could cause some confusion among your clients regarding how they’re affected by the reforms. As you address those changes with your clients, Amsden says, it’s important to emphasize to your clients that their fees and services will remain the same.

“We want to make sure that clients understand that none of this actually changes what the client has, or what they are paying,” she says. “They are just going to be getting a lot more data.”

Still, you can anticipate that at least some clients will be surprised and upset by the new disclosure. For example, depending on your clients’ level of sophistication, they may not be aware that you receive a trailer fee on each of their mutual fund investments.

“Many people think the advice they are getting is free, because they don’t see it being paid; they don’t feel it being paid out of their pocket,” Wolburgh Jenah says. “So, there is a whole adjustment there of helping people to understand that.”

It probably will be necessary to walk some clients through their new client statements and performance reporting disclosure to help them understand the new metrics and definitions and what those mean in the context of the account.

Strive to use plain language as much as possible when addressing the changes with your clients. Even terms that are commonplace to you – such as “trailer fees” and “management expense ratios” – are foreign to many clients, and can make the education process more confusing than necessary.

– Focus on value

The new disclosure requirements pertaining to fees and commissions could lead to some potentially uncomfortable conversations with your clients about the compensation you receive. However, you can frame that conversation in a positive way by focusing on the value that you provide.

Before jumping into these conversations, however, it’s important for you to be confident in the quality of service you offer. Take time to reflect on the services that you provide and all of the ways you add value to your clients’ lives.

“There is a true value that a full-service broker is giving clients,” Dupont says, “and it’s his or her job to make sure that value proposition is clearly articulated.”

In some cases, it can be a challenge to get your clients to recognize the value in the advice you provide right away, says Amsden: “People don’t see value in money or investments. They see value in what you can buy with it.”

To translate the value into more meaningful terms, Amsden suggests, focus on the tangible outcomes of the services you provide. For example, point to the post-secondary education your client was able to afford for the children as a result of saving diligently with RESPs; or to the nest egg you’ve helped your client accumulate, which will allow him or her to achieve a comfortable retirement. It’s important to customize this message to each client, to ensure it resonates with his or her goals and priorities.

“There will be many ways that advisors will be able to find analogies to [drive] home the value they provide,” Amsden says. “Advisors really do get to know their clients and what they’re hoping to do in retirement, and [advisors] can translate their value into something that will help [clients] achieve that retirement.”

It can also be effective to highlight the work you do in between client meetings, such as monitoring and managing your clients’ portfolios and keeping in touch through phone calls and e-newsletters. Your clients may not realize the amount of work you do behind the scenes to keep their portfolios on track or comprehend the extensive amount of time and knowledge they would need to manage their investments independently.

The more you’re doing to nurture the relationship, Lee says, the easier it will be to get your clients to see the value in the service you’re providing.

“The critical concept is that you should be of service to people,” Lee says. “Once you have delivered that level of service, I’m tempted to say that you have nothing to worry about. If you’re going to show that you’re charging X amount of money but you’re only calling clients once a year, it makes it more difficult for you to argue that you’re bringing the proper value proposition.”

– Move client-name accounts

The new requirement for dealers to send quarterly account statements for client-name securities (held directly with the portfolio manager or fund company) could lead to new costs for investment firms, as it forces them to identify and document additional accounts. As Amsden says: “The off-book stuff can be hard to track down.”

Many dealers are urging their advisors to persuade clients who have such accounts to bring them into the dealer, so they can be managed alongside the clients’ other accounts and included on the same statements.

Switching a client-name account to a nominee account (an account held with the dealer) generally subjects clients to new annual fees, which can make the shift a tough sell. However, highlighting the advantages of nominee accounts can smooth the transition. For example, unlike client-name accounts, nominee accounts are covered by the Canadian Investor Protection Fund in the event of dealer insolvency.

Managing clients’ assets can be easier for advisors when they’re held in one place, says Colleen Bronson, senior advisor, market intelligence, strategy and communications, with NBF’s wealth-management division in Montreal: “Moving investments on-book [makes it easier] for the client to understand, and for the advisor to give more sound advice.”

– Seek support

You may be able to find support for adapting to the new regulations directly within your firm. NBF, for example, is in the process of tweaking its training programs to include support specifically for CRM2.

“We have programs at National Bank to help [advisors] articulate their value,” says Dupont. “We are going to fine-tune some of those programs to cater specifically to CRM2.”

Support and guidance are also available from various industry groups. The IIAC, in particular, has established a variety of committees dedicated to sorting through the details of CRM2 and helping members understand what they need to do in order to comply with the new regulations.

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