Six Things You’ll Want To Know About CRM2’s New Reporting Rules

What if you were far-sighted all your life and never knew it? To you, “blurry” would be the norm. Imagine how it would rock your world if you were given a decent pair of reading glasses.

As whacky as that sounds, millions of Canadian investors are about to experience something like that in January 2017, when financial firms begin providing annual cost disclosure and performance reports as required under Client Relationship Model Phase 2 (CRM2).

Are you ready for the sharper view of your investments? Here are six things to help you leverage what you’re looking at under CRM2’s new reporting rules.

1. You are about to see what your investment services are directly costing you.

The financial service costs you’ve already been incurring are likely the same as ever … but now, you’re going to see them more clearly, including line-item details on how much you’re spending on administrative, trading, advisory and similar service-related fees.

2. You are also about to see what your investment services are indirectly costing you.

You’re about to find out how much your financial advisor is receiving from costs you’re incurring with third-party product and service providers. For example, if a fund in which you’re invested is directing some of its fees back to your advisor as a commission, that fee is coming out of your share value. Since you are ultimately the one bearing these costs, the regulators who crafted CRM2 felt they should be included in your all-in financial service fee disclosures.

3. You are about to see these costs in dollars and cents.  

CRM2 cost disclosures will be in dollars instead of percentages, which may result in some sticker shock. For example, it’s somehow easier to accept a 1% annual fee on your $1 million of assets, than it is to be hit with the $10,000 that represents. Our take: Your best interests are served when your viewpoint is fully informed.

4. You are NOT about to see what your investment products are costing you.  

CRM2 helps you get a handle on your financial service costs, but there are no new reporting requirements on product costs. Practically speaking, this makes it harder to compare the all-in costs of different kinds of advisory relationships. “Advisor A” may incur higher advisory fees than “Banker B.” But cheap advice combined with expensive products may cost you way more in the long run. A fee-based advisor may still be the sensible choice if he or she is advancing your best interests with a low-cost tax-efficient, globally diversified portfolio. (Think sensibly structured mutual funds and/or ETFs.)

5. You are about to know more about your investment performance.

CRM2 also calls for an annual performance report. For each account you hold, your financial provider must disclose: (1) your deposits and withdrawals (in dollars); (2) the change in value (in dollars); and (3) your one-, three-, five- and ten-year rates of return (in percentages) as of January 1, 2017.

6. You’ll still want to do some number-crunching on your own (or with your advisor).

While standardized performance reporting is a big step in the right direction, there are still some “gotchas” lurking between CRM2’s guidelines. First, account-level performance is interesting, but it does not tell you how your total portfolio is doing – and that’s also very important. If your advisor is not augmenting CRM2’s guidelines with total portfolio returns, you’ll want to crunch those numbers on your own.

Also, your CRM2-guided “personal” (or “money-weighted”) rate of return helps you measure whether you are on track to meet your financial goals. (Eg.: I want to have $2 million saved, but so far I’ve only got $500,000.) But because it factors in your unique – and uniquely timed – contributions and withdrawals, it renders the data essentially useless for comparing your returns to outside benchmarks or among different advisors if you hold assets at multiple institutions. For that, you or your advisor should calculate your “time-weighted” rate of return, which appropriately omits individual cash flows from the necessary equation so you can make appropriate, apples-to-apples comparisons.

Bottom Line, It’s All About Your Best Interests

As long-time champions of transparent fees, clear performance reports and client best-interest advice, we at PWL look forward to CRM2’s increased, industry-wide disclosures. With a more level playing field, the investor wins – and that’s a good thing.

By: Jennifer Vachon | 0 comments

Six Questions To Ask Your Financial Advisor (or Maybe Just One)

You don’t want to entrust your life savings to just anyone, right? But let’s face it, when vetting financial advisors, you’re usually the one who is at an informational disadvantage. 

Figuring out whether an advisor is offering you a fair deal can be like sitting at a poker table where the other guy is holding all the cards. Here are six questions you can ask an advisor to more effectively stack the due diligence deck in your favor. 

1. What steps have you taken to represent your clients’ best interests? 


Anyone who wants to advise you about your financial well-being should be willing to serve your best interests above all else, right? Unfortunately, it’s not required. It’s up to you to spot advisors who may claim they’ve got your back … only to disappoint you once your back is turned.
In our opinion, if an advisor won’t fully commit
to always acting in your best interest,
you can skip to the end. Interview over.

Hint: One way to find an advisor who is committed to placing your best interests first is to look among those who have successfully completed a Centre for Fiduciary Excellence (CEFEX) assessment and received CEFEX certification, confirming that the firm has demonstrated adherence to the industry's best practices. PWL Capital is proud to be one of the first investment advisory firms in Canada to successfully complete this independent certification process for our entire business.

2. How do you get paid? 


Advisors can be compensated through the management fees you pay them directly, as well as potentially through third-party arrangements. We agree with Vanguard founder John Bogle, who has famously borrowed from holy writ in describing advisor compensation: “No man [or woman] can serve two masters.” If your advisor is receiving undisclosed third-party incentives, your best interests may end up playing second fiddle to those other sweet nothings being whispered in their ears – such as undisclosed commissions, sales quotas, referral arrangements or bonuses for recommending one product over another. To establish your financial success as your advisor’s only “master,” a transparent, fee-based arrangement is preferred.

3. What is your investment strategy, and why? 


How will the advisor manage your money? 

  • Does he or she offer a written Investment Policy Statement that documents your personal financial goals and your strategies for achieving them? 
  • Is your portfolio structured according to decades of robust evidence indicating how to capture long-term market growth in accordance with your risk tolerances? 
  • Is the strategy implemented with efficient, low-cost solutions that make best use of this same evidence? 
  • Are your assets being considered as an integrated whole, whether directly under your advisor’s management or held in outside accounts such as your company’s retirement plan?

4. What services do I receive for your management fee? 


Depending on your personal circumstances, there are other areas of expertise you may seek from a financial advisor beyond just managing your investments, including but not limited to financial planning, retirement planning, estate planning, tax planning, risk management (insurance), special needs planning and more. For the same fees you’re paying for basic investment management, you may be able to find a wealth manager who knows how to add value and reduce risk across the spectrum of your financial life.

5. Can you provide me with several references? 


It never hurts to hear how others feel about an advisor with whom you’re considering doing business. Naturally, expect to be pointed to clients who are generally happy with the relationship, but you can probe deeper by asking pointed questions such as what they like most – and least – about doing business with the firm. 

6. How will you report performance information to me? 


There’s some good news on this front. The biggest portion of the second phase of the Client Relationship Model (CRM2) is set for implementation in January 2017. Granted, our financial regulators may not be receiving any awards for artistic creativity but, despite the decidedly un-catchy name, CRM2 is designed to deliver more standardized and complete performance reports and related disclosures throughout the financial industry.

That’s a good thing … at least for those who prioritize best-interest relationships and pricing transparency for their clients. For those who feel otherwise, well, perhaps their days at the table are numbered. CRM2? Bring it on! 


By: Jennifer Vachon | 0 comments