“Botched” CRM2 implementation just adding to investor confusion: veteran adviser

Tim Paziuk

By Tim Paziuk

Special to the Financial Independence Hub

After 37 years in the financial services industry I realize I shouldn’t be surprised, and I’m not. I’m shocked. Shocked by the confusion created by the very people who are charged with the responsibility of watching out for us, mainly the Canadian Securities Administration (CSA).

Here is the first paragraph from the overview on the CSA website

The Canadian Securities Administrators (CSA) is an umbrella organization of Canada’s provincial and territorial securities regulators whose objective is to improve, coordinate and harmonize regulation of the Canadian capital markets.

I draw your attention to the words ‘improve, coordinate and harmonize’. In my opinion, they have done more to hinder and confuse the average Canadian than to provide clear and complete information.

Let me give you some background on the recently implemented program referred to as the Client Relationship Management Model – Phase 2 (CRM2).

According to the Ontario Securities Commission:

The Client Relationship Model – Phase 2 (CRM2) amendments to NI 31-103 that came into effect on July 15, 2013 are being phased-in over a three-year period. These amendments introduce new requirements for reporting to clients about the costs and performance of their investments, and the content of their accounts. The requirements apply to dealers and advisers in all categories of registration, with some application to IFMs as well. For more information about these amendments, see CSA Notice of Amendments to NI 31-103 and to 31-103CP (Cost Disclosure, Performance Reporting and Client Statements).

It sounded like a good idea when the decision was made to force companies to disclose costs and performance, but how it is being implemented is an insult to Canadians.

Starting in January, some companies began sending out fee and performance reports; others will wait until July. Some companies have disclosed all fees and costs; others have provided the bare minimum. Some companies are creating separate reports for this new information; others are including it on the back of your regular statements. Some companies are even using different reporting methods across segments of their own firm.

Every financial institution should be required by law to disclose all fees and costs. The reporting should be standardized and regulated.  Companies should have no ability to manipulate or format the information in such a way that is deceptive or misleading.

Don’t let institutions hide behind lame-duck rules

I believe it’s the right of every Canadian to know what they’re being charged for investment services. Financial institutions should not be allowed to hide behind lame-duck rules that go only half-way.

For many, you may never know the true price you’re paying to have your money invested.  If you’re invested in mutual funds (or their evil cousin, the segregated fund) you are probably not shown the entire cost. Most of you are being shown a fraction of the true cost. CRM2 requires companies to disclose: operating charges, account management and transaction charges, as well as compensation earned from third parties (it’s under this third section that you should find how much was paid to your advisor). It does not require companies to disclose the amount you pay to the fund manager.

Many of the reports I’ve studied indicate that the mutual fund management fees are available in the prospectus or fund fact documents you received. That’s true but they’re only represented as a percentage.

Reported mutual fund MERs may be half the actual costs

If you own a mutual fund with a Management Expenses Ratio (MER) of 2.6%, what shows up on your report could be less than half of the actual cost. If the fund manager is charging 1.6% and your advisor is being paid 1%, the CRM2 rules only requires companies to disclose the 1% paid to your advisor in a dollar amount. The 1.6% the fund manager is charging does not have to be reported on your statement, it simply has to be disclosed somewhere in the mass of paperwork you got when you originally bought your investment, and again, only as a percentage.

It’s impossible for me to know who has all the information and who doesn’t, but I can tell you this. Every Canadian Investor will be receiving some information about investment performance and fees/costs within the next few months (all companies have to release the information by July):  watch for it. It may come as a separate report or it may be attached to a monthly report. If you own any mutual funds ask your advisor if the entire MER is represented on the report. If they say no, then ask them to provide you with a detailed list of the undisclosed amount as a percentage. With this information you can estimate the entire cost.

No requirement to report high-fee Seg Funds

If you’ve invested in segregated funds you’re probably not going to get a report at all because there is no requirement under CRM2 to disclose any segregated fund fees. If this applies to you, ask your advisor for a list of investments and their related MERs.

Last October I was asked by CBC to comment on a settlement between CIBC & the Ontario Securities Commission, here’s a link if you want to see it.

I stated at the time that the investment companies in this country that are collecting fees from investors have the ability to disclose, in dollar amounts, exactly how much investors are paying. I now have proof that this is the case.

MD Management is an investment firm which is owned by the Canadian Medical Association. It primarily provides investment management for physicians and their families. MD Management offers a number of different investment options for their clients including a wide range of mutual funds. MD Management, unlike most other companies I’ve seen, has decided that their members deserve to know exactly how much they’re paying for investment management. Starting in January, they sent out their “2016 Investment Performance Report and Fees and Compensation Report.”

What was ground-breaking in their report was the section that read “Total Mutual Fund MER Costs.” They voluntarily disclosed the full cost of the MER that their clients pay for mutual funds as a dollar amount. Although it’s not a requirement of CRM2 they did it and I commend them for it.

I mention MD Management because they’ve done what I knew could be done: calculate the dollar cost of investment management to investors. Unfortunately, without standardized and regulated disclosure for implementing these CRM2 regulations most companies are choosing the moral low road and not going with full disclosure.

Few will take moral high ground of voluntary disclosure

I have read that a few other companies are going to take the moral high road with voluntary disclosure but they’re still the minority. I think it’s time for the CSA to do what’s right and give the public at least a chance of understanding what’s being taken from them.  The CSA’s stated objective is to, “improve, coordinate and harmonize regulation of the Canadian capital markets.” In this respect, it seems as if they are failing to achieve their objective with the botched implementation of CRM2.

Tim Paziuk is a Lecturer, Financial Advisor, and author of Professional Corporations: The Secret to Success & The Financial Navigator – Managing Your Success. He is also the president of TPC Financial Group, a fee-for-service planning company based out of Victoria, BC.

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