What Is Client Relationship Model 2 or CRM2?

What Is Client Relationship Model 2 or CRM2?

CRM2, or Client Relationship Model 2, is a Canadian regulation that enhances transparency for investment advisors and provides better information to investors. It ensures improved disclosure by requiring investment advisors to provide investors with an investment report showing their portfolio's performance and alignment with financial goals. Additionally, it mandates a summary cost report detailing fees incurred over the past 12 months, including an itemized list of charges. Overall, CRM2 promotes transparency and empowers investors to make informed decisions about their investments.

Basics

CRM2 is a set of regulations implemented in mid-2017 by the Canadian Securities Administrators (CSA) to enhance transparency in the financial industry. These rules apply to Canadian investment dealers and advisors and aim to provide investors with clearer information about the costs and performance of their accounts.

The CSA, an organization that ensures regulatory consistency across Canada's provinces and territories, introduced CRM2 as part of its ongoing reform of the client relationship model. The main objective of CRM2 is to improve the disclosure of financial information to investors, enabling them to make more informed decisions about their investments.

Figuring out CRM2

CRM2 aims to enhance transparency for Canadian investors by offering a comprehensive view of their account performance and associated costs. To achieve this, two reports are mandated for inclusion in an investor's portfolio. These reports are as follows:

Report on Investment Activities

CRM2 introduces improved disclosures for investors, including a clearer account performance report and the use of a money-weighted rate of return. These enhancements aim to provide investors with a better understanding of their portfolio's performance and its alignment with their long-term financial goals. The account performance report utilizes standard measurement periods, while the money-weighted rate of return incorporates all cash flow debits and credits to provide a comprehensive view of investment returns. Overall, CRM2 promotes transparency and empowers investors to make informed decisions based on their financial objectives.

Expense Report

CRM2 introduces changes to how fees are presented to investors, emphasizing the disclosure of costs in dollar amounts rather than as percentages. This shift aims to provide greater transparency and clarity for investors, allowing them to understand the actual dollar value of fees incurred over the past 12 months. By highlighting the tangible costs, investors can assess the impact of fees on their investment returns, especially when the performance of their accounts has been less favorable. This change helps investors make more informed decisions and be aware of the potential long-term effects of fees on their investment portfolios.

CRM2 and Investment Advisors

CRM2 requires Canadian investment advisors to demonstrate the value they provide to the fees they charge. This transparency in fee disclosure may prompt some Canadian investors to explore lower-cost alternatives like robo-advisors or opt for passively managed portfolios. Passive funds are comprised of securities that a portfolio manager does not actively trade, often tracking stock indices such as the S&P 500. Many exchange-traded funds (ETFs) fall into this category.

For high-performing advisors, CRM2 presents an opportunity to attract clients away from underperforming competitors. However, advisors who fail to justify their fees and provide sufficient value may face challenges under CRM2. Regulators argue that advisors should already be capable of explaining and justifying their fees, despite the additional burden imposed by the regulation.

CRM2 and Investors

CRM2 simplifies the process for Canadian investors to evaluate the value they receive from their advisors by providing standardized performance reporting and calculating direct and indirect fees. This enhanced transparency enables investors to make more informed choices about their investments and opens the door for comparison shopping when seeking investment advice. CRM2 streamlines the assessment of performance and costs, empowering investors to make well-informed decisions.

CRM2 and MFDA

The Mutual Fund Dealers Association of Canada (MFDA) published a discussion paper in mid-2018, advocating for additional disclosures of total fund costs to clients. Currently, certain investments like guaranteed investment certificates (GICs) are not included in the existing CRM2 reporting. The MFDA's proposal aims to raise the bar by expanding cost reporting, enabling clients to make better investment decisions.

Conclusion

CRM2 has been a positive development for the Canadian investment industry. By promoting transparency and empowering investors to make informed decisions, it has helped build trust between clients and advisors. While it may be challenging for some advisors to justify their fees, the regulation ultimately benefits both parties by encouraging better communication and more efficient investing.

Client Relationship Model 2 (CRM2)
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