It’s here. Known as the Client Relationship Model 2 (“CRM2”), this industry-wide amendment from the Canadian Securities Administrators (“CSA”) now requires the investment industry—and advisors—to clearly state and explain the fees charged to clients, the services provided, the suitability of investments, as well as disclosure of conflicts, and enhanced performance disclosure. Some in the industry are adapting to the changes by rushing to lower pricing—a race to the bottom. But some firms and their advisors have increased the level of service they provide and adjusted their prices at the same time.

CRM2 is not solely focused on price transparency. Take, for example, the recent implementation of disclosure on bond transactions that came into effect in July of this year. The CSA’s disclosure example identifies the gross commission earned by the advisor and only footnotes the fees charged by the dealer. The CSA-recommended footnote for dealer compensation is: “Additional markups and markdowns were added to this transaction that increased the cost of the transaction.” A common misconception about CRM2 is that the total fee paid by the client will be disclosed. The CSA does not require dealers to disclose their take on bond transactions.

Other examples of selective disclosure include ETF and mutual fund manufacturing costs. The F-class fee will not be disclosed. Some advisors are moving to lower-cost products or to direct security investments in an effort to maintain their commissions or even increase them while lowering the cost to the client at the same time. By July 2016, this may end up being a competitive disadvantage as the new fee disclosure document will highlight higher fees charged by the advisor.

The legislation is directed squarely at advisors service and the price they charge. There is no doubt that regulators and the industry realize that the demands on individuals to prepare for retirement are increasing. The traditional three-legged stool of retirement savings consisting of a government pension, individual savings, and a corporate pension has lost its stability as defined benefit pension plans become a thing of the past for most. Retiring with the lifestyle we want will be more difficult unless we get the right advice and coaching, and the advice clients need is multi-faceted and requires professional help. Advisors bring an understanding of their clients’ individual circumstances, as well as an ability to identify different services and appropriate investments that clients need.

The Right Fit

Suitability is another major focus of the CRM2. The CSA wants to make sure advisors know their products and that they are suitable for each individual client. One of the challenges is the investment industry’s addiction to creating an ever-increasing number of investment products. After analyzing over 200 advisory practices, Russell investments found that the average advisor has an aggregate of over 450 positions scattered across client portfolios. For an average team with just over two people, that is a lot of positions to keep on top of. This can happen through inheriting of clients, buying of practices, adding new clients, changing attitudes towards different products, etc. But unless advisors have a terrific on-boarding and ongoing due diligence and implementation process, the overall position count can look messy after 15 or 20 years in the business.

The new performance reporting guidelines also have the potential to impact client statements significantly with the change from time-weighted to dollar-weighted performance reporting. The majority of client statements do not take into consideration the impact of timing of contributions. For clients who make significant contributions or withdrawals, the performance of their investment savings will be impacted positively or negatively relative to current reporting standards. A positive next step for the majority of investors would be reporting relative to a retirement-funded ratio rather than benchmark reporting. Clients ultimately want to know whether or not they are going to be okay relative to their own goals. Whether or not they beat a benchmark isn’t relevant.

There is much more that can be written on this topic, and we may not truly know the outcome for years to come. It is important to understand that this legislation is more about the service being delivered than simply the amount being paid for that service. An organized business with a disciplined investment process and a deep understanding of client circumstances and needs will produce more value for Canadians and the industry.