New disclosure rules

Will you notice CRM2?

June 27, 2014

On July 15, 2014, phase 2 of a new investment regulatory framework takes effect.  For some investment advisors and consumers, this may mean a big change in their relationship.  For others, it may just be business as usual.

The initiatives are called CRM, for Client Relationship Model, and Point of Sale (POS) disclosure.  The regulatory changes have been developed by the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association (MFDA) and approved by the Canadian Securities Administrators (CSA).

I will try to stop serving alphabet soup now, although there are plenty more acronyms where those came from.

POS (which largely applies to mutual fund dealers and salespeople) and CRM2 (the 2013 to 2016 phase of CRM) are complementary initiatives aimed at increasing transparency and clarity for consumers about the costs and other details of investment products and advice.

CRM2 affects investment dealers, full service brokers, exempt market dealers, scholarship plan dealers and fund managers.  Banks, credit unions, investment counsel firms and any other registered entities who sell directly to the public must comply.  (Unfortunately, sales of life insurance products are exempt.)

As July 15, the purchase of a mutual fund will have to include pre-trade written or oral disclosure of all charges paid or potentially payable by the consumer when buying or selling the fund.  This includes a plain explanation of deferred sales charges (DSCs), trailing commissions, MERs and any other costs.

Within two days of that sale, a document called Fund Facts, a plain language disclosure related to that particular fund, must be mailed to the consumer.

For investment dealers under the jurisdiction of IIROC, CRM2 will require additional information to be included on the trade confirmation, showing actual charges and disclosing dealer compensation on debt obligations like bonds, but not deposit instruments like GICs.  (Dealers and investment advisors earn money by buying bonds at one price and selling them to clients at a slightly higher price, and earn commissions on GICs.)

All of these changes are positive, and welcomed by those advisors who have always made sure their clients understood how the advisor was paid and the total costs of advice.  The advisors who are providing substantial value in excess of their costs are quite excited by these changes, and the really significant increases in disclosure coming in 2015 and 2016.

In July, 2015, account statements will be expanded with quarterly disclosure of the market value and cost of each security, which ones are subject to DSCs, which investor protection fund is protecting the account and certain other items. The goal is to show investors whether they have gained or lost on each security, and on the account overall.

Again, these are positive changes, but a lot of time may be spent helping consumers understand what each term means.

The real fun will be obvious in July, 2016, although the multi-million dollar preparation costs for dealers are being incurred now.  At that point, there will be full and complete disclosure, both in dollar and percentage terms, of any and all compensation or potential compensation received by dealers and advisors, and a full listing of any costs or potential costs that might be incurred by consumers, in the purchase and ownership of investments.

As well, performance reporting will be mandatory, with annualized total percentage returns for one, three, five and 10-year periods, and since inception.  This is great, except the requirement is for three different types of performance calculation, which give different results, and guaranteed to confuse.

Again, many of us advisors are excited by these changes, and see it as a great opportunity to gain market share at the expense of those few advisors who have been overcharging or obscuring facts.

I look forward to keeping you up-to-date on the evolution of CRM2 over the next two years, and also whether or not Canada decides to follow Britain and Australia in eliminating all commissions and forcing all consumers to pay directly for financial and investment advice, as my clients have chosen to do for most of my career. 

We live in interesting times!

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Dollars and Sense is meant as an introduction to this topic and should not in any way be construed as a replacement for personalized professional advice.

Please consult legal, tax and investment experts for advice on your unique situation.

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David Christianson, BA, CFP, R.F.P., TEP, CIMis a financial planner and advisor with Christianson Wealth Advisors, a Vice President with National Bank Financial Wealth Management, and author of the book Managing the Bull, A No-Nonsense Guide to Personal Finance.