CRM2: What it Means, How it Works, Impact

What Is CRM2?

CRM2, short for Client Relationship Model 2, refers to rules for Canadian investment dealers and advisors that require greater transparency about the cost and performance of client accounts. The regulations, which were fully implemented in mid-2017, were the second stage of a reform of the client relationship model by the Canadian Securities Administrators (CSA).1
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 The CSA is the umbrella organization that harmonizes regulations across Canada’s provinces and territories. CRM2 is helpful since it improves how financial information is disclosed to investors.

KEY TAKEAWAYS

• CRM2, or Client Relationship Model 2, is a set of rules for Canadian investment advisors that require improved disclosure to investors.
• CRM2 requires an investment report to help investors see their portfolio's performance, and how it relates to their financial goals.
• CRM2 also requires a summary cost report with the last 12 months of fees, including an itemized list of any charges to the account.

How CRM2 Works

CRM2 is meant to create greater transparency for Canadian investors by providing them with a clear look at their account performance and the costs involved to achieve that performance. The two reports that must be included in an investor's portfolio are as follows:

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Investment Performance Report

The new disclosures under CRM2 include a clearer account performance report using standard measurement periods. The report is designed to help investors see how their portfolio is performing and how that performance relates to their long-term financial goals.

The return on the account will be reported using a money-weighted rate of return to provide a more personal view of an investor's progress towards their financial goals. MWR is an inclusive method of calculating a portfolio's rate of return since all cash flow debits and credits are factored into the calculation. Those cash flow changes might include dividends, withdrawals, deposits, and the sale price of the security.

Cost Report

The summary cost report shows the last 12 months of fees, including an itemized list of any charges to the account. One of the most interesting changes due to CRM2 is the presentation of fees in terms of dollars paid rather than as percentages. Although there is no mathematical difference between the two styles, seeing fees in dollars for the first time—particularly if the accounts have not performed well—may cause sticker shock for some Canadian investors.

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For example, a fund that charges a 1% fee might not appear to be a lot of money. However, if an investor's return is 5% and they're being charged 1% per year, after several years it can add up to a considerable cost that reduces the long-term rate of return on the fund. Disclosing the costs in dollars provides greater clarity for investors so they can see the actual cost year-to-year. Some investment funds and advisors can easily charge 2% to 3% in fees each year, regardless of the fund's performance.

How CRM2 Affects Investment Advisors

With fees being made explicit in dollar terms, Canadian investment advisors need to show that they are providing value for the fees that they charge. There could potentially be quite a few Canadian investors who start looking at lower-cost options such as robo-advisors, which have no human involvement in investment selection. Investors might also opt for low-cost passively managed portfolios. A passive fund is a basket of securities in which a portfolio manager is not actively buying and selling securities. Oftentimes, a passive fund might track a stock index such as the S&P 500. Many exchange-traded-funds (ETFs) are passively managed.
There is, of course, also an opportunity for high performing advisors to use CRM2 as a way to pull in clients from poor performing competitors. However, if an advisor isn’t providing value for the fees they're charging, then CRM2 could be bad news for them. Regulators argue that while the act of having to explain and justify their fees to clients may be burdensome, advisors should already be able to explain and justify their value.

How CRM2 Affects Investors

Canadian investors already could figure outperformance and costs on their own, but it was a longer and more complex process than it should have been. CRM2 does the work of calculating direct and indirect costs, as well as standardizing performance reporting. For investors, CRM2 makes it easier to evaluate the value that they're getting from their advisors.
The ease of evaluation also opens the door for comparison shopping when looking for investment advice. In other words, CRM2 helps to provide investors with making more-informed choices about their investments.

CRM2 vs. MFDA

In mid-2018, the Mutual Fund Dealers Association of Canada (MFDA) published a discussion paper that advocated for the disclosure of total fund costs to clients on top of the CRM2 disclosures. Certain investments that are not securities are not required to be included in the CRM2 reporting such as a GIC or guaranteed investment certificate, which is similar to a U.S. certificate of deposit. Such disclosure would enable clients to make better investing decisions. This disclosure, outlined in an MFDA bulletin entitled "Discussion Paper on Expanding Cost Reporting," would raise the bar compared to CRM2. 
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