Get ready for POS3 and CRM2 deadlines

By Anthony A. Boright

Special to the Financial Independence Hub

In my last guest posting for the Financial Independence Hub I talked about the financial services industry going digital even though there are some growing pains.

I also mentioned the coming May 30 Point of Sale Stage 3 (POS3) regulatory deadline for pre-sale delivery of disclosure documents to mutual fund investors. On that day, dealers and advisors will have to send investors Fund Facts disclosure documents before the investor decides to buy a fund. Until May 30, dealers and advisors still will be able to abide by the previous industry regulation (i.e. POS Stage 2), which gave them two days to provide the Fund Facts document to their clients after the mutual fund purchase. Not so beginning May 30.

Stage 1 was four-pager in 2011

This is part of the industry satisfying the call by regulators to move ahead with POS (Point of Sale) delivery requirements for Fund Facts. Stage 1 of the POS regulation was introduced in 2011 with the creation of the short, four-page Fund Facts document that was in plain English and easily understood. It has since replaced the lengthy, jargon-filled legal prospectus document.

The introduction of Fund Facts at or prior to the Point of Sale means an electronic transaction will take place in most disclosure cases. After all, electronic is instantaneous. We first launched our Fund Facts delivery solution, www.investorpos.com, in 2011. Since then approximately 96% of these transactions have been electronic while only 4% have been going through our printed mail stream.

The document repository contains the universe of most recently filed Fund Facts documents from every mutual fund and ETF manager in Canada, so dealers and their advisors can access these disclosure documents from a single source. These new regulations will result in cost savings for the industry that can be passed on to investors. One of our bank clients requested and received a regulatory exception, and implemented our POS solution well in advance of the regulation date because they could see the cost advantage – both for them and their clients.

CRM2 deadline is July 15

Another date to watch is the CRM (Client Relationship Model) 2 deadline of July 15. The idea behind CRM2 is to provide investors with clear information about the securities fees and commissions they are paying. The idea behind this is to make investment dealers, brokers and portfolio managers more accountable.

In a nutshell, CRM2 means all dealers must provide statements with detailed information about what fees are being charged to the client in actual dollar amounts. This will also include sales incentives and embedded fees. No longer will statements present fees as a simple percentage. Now customers will know exactly how much they are paying for the service, and also how those investments are performing.

There is definitely growing support around the world to eliminate embedded commissions from mutual funds; this has already happened in the United Kingdom and elsewhere. Likewise, there is no doubt that the move to greater disclosure, transparency and focus on the overall cost of investments will only increase in future. The financial crisis of 2008 was the catalyst behind this, and recent market softness has renewed the commitment of those who are intent on educating investors about their portfolios.

Some people may be in for a surprise when they learn they haven’t been paying 1% or 2% as they had thought, and may turn to low-cost discount brokers or ETFs. On the other hand, they may see the value, and feel more comfortable knowing exactly how and what their advisor makes, and in that sense this could improve the advisor-client relationship.

Industry will be more accountable to its customers

Either way, the purpose behind CRM2 and POS3 is to make the industry more accountable to its clientele, and to make that clientele more knowledgeable about their own investments. However, while CRM2 hangs on the July 15 deadline, investors’ statements may continue to appear just as they have for some time yet. Dealers will have up to one year from that date before they have to send investment performance and compensation reports. Thus, most people will likely not receive this data until the first quarter of next year.

The Canadian Securities Administrators (CSA) says these changes bring Canada in line with regulatory standards around the world. And having an easy-to-understand breakdown of fees with CRM2 only leads to a better informed and better educated investor.

Anthony Boright is President and co-founder of InvestorCOM (www.investorcom.com), which leverages technology to address the evolving regulatory disclosure and communications needs of the financial services industry. InvestorCOM helps its clients create and distribute their communications online, as well as through traditional print/mail channels. Clients include banks, asset managers, life insurance companies, large and small IIROC (Investment Industry Regulatory Organization of Canada), and MFDA (Mutual Fund Dealers Association of Canada) dealers and advisors serving investors.