CRM2 is Coming

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Many “advisors” are in a state of panic because “CRM2” will be here in January.

What is CRM2? you might well ask.  It is the second step of the implementation of changes to the securities regulations in Canada.  This will require the disclosure of the dollar amount of commissions and fees paid to the dealer firm.  The amount paid will appear for the first time on a lot of statements in January for the 2016 calendar year.  Many individual investors will be shocked at how much they are paying for the “advice” they are getting.  The amount shown will not include the actual investment management fee paid to the mutual fund investment company.  Many people will see the number and say “no wonder I can’t beat the market”.

For example, if you have an equity fund, the management expense ratio (aka MER) might be as high as 2.5%.  Of this, your dealer firm may be getting half.  So, if your fund is worth $400,000, you will be paying $10,000 per year, $5,000 of which is paid to the dealer firm who, in turn, pays the person or team with whom you deal directly.  This $5,000 will now show up on your statement.  The other $5,000 that is paid to the investment manager (e.g., Trimark) will still not be disclosed.

Many advisors provide comprehensive financial planning as part of their service. And, really, they should.  Your investments are just one part of your financial future.  Even for these advisors, some clients may still feel they aren’t getting much bang for the buck, especially for the larger investment amounts because the fees will still seem pretty large.  In these situations,

Unfortunately, there are also many “advisors” who give little, if any, advice.  They basically sell the mutual funds (or whatever), collect the ongoing fees and provide little service. For these salespeople, CRM2 will be a problem.

Of course, this is always a problem with commission based sales.  The seller is paid to make sales, not provide service, so some will do just that, sell as much of the highest commission product possible and move on to the next buyer.  I do realize that many commission based sellers do provide service but often the service is just used as another sales opportunity.

This where fee only financial advisors (also known as fee for service financial advisors) come in.  They will provide a comprehensive financial plan and help you choose a financial advisor or help ensure your investments are in line with your goals and objectives and your risk/reward preferences.  They will spell out the services and costs ahead of time and they will work in your best interest because you are the one paying them.

I have always wondered why the MERs have managed to stay so high, with trillion dollar funds still charging in excess of 2%. It will be interesting to see how this all plays out.

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