What is CRM2 and what does it mean to me?
In this month’s blog post: STOP Heeding Transaction-Based Investment Advice, we mentioned that regulators here and abroad have been scrutinizing compensation arrangements and reporting standards with an eye toward safeguarding investors’ interests. Of course regulatory efforts to protect investors from harm don’t lend themselves to tidy beginning and ending dates. It’s a never-ending story, with many twists and turns along the way. But one milestone you may have been reading about in the press is Canada’s Client Relationship Model, Phase 2.
What’s it all about? Affectionately known as CRM2, the reforms are aimed at more effectively informing investors about their personal rates of return – which is in contrast to the more usual way of reporting returns these days in the form of “time-weighted” returns. Here’s a Globe & Mail piece that explains the difference. CRM2 also includes new reporting requirements related to industry charges and compensation.
As we described in our blog post, we’re all for transparent costs and performance reporting, and we hope that CRM2 will help investors become better informed on both of these fronts. At the very least, the new reporting (currently scheduled to go into effect in July 2016) should help raise awareness that there are often many more costs than meet the eye during the sales pitches of high-cost product promoters.
That said, we’re not expecting miracles. Call us cynical, but we can’t help but agree with Vanguard CEO and index fund champion John Bogle’s observation in a Wall Street Journal op-ed: “There are few regulations that smart, motivated targets cannot evade.”
It’s possible that the new reports will generate as many questions as they answer for investors who aren’t versed in industry jargon. It could also lead to inappropriate, apples-to-oranges comparisons between personal rates of returns versus industry benchmarks. The former is heavily influenced by your own unique movement of money in and out of your portfolio, while the latter is simply the ebb and flow of the particular market you’ve invested in during that same time. The two aren’t expected to march in lock step with one another except by random chance.
In short, when it comes to performance reporting, we hope to remain a source of clarifying information. We expect that investors will continue to benefit from objective explanations about what the reports they receive really mean to them, and how to make best use of the information to achieve their personal financial goals.
On the fee front, we moved to a transparent fee-based arrangement over a decade ago, which means our clients pay us directly for our objective advice, with no third-party forms of payment muddying the waters of our relationship. Clear and simple compensation arrangements should always be clear and simple to report to our clients. It’s also easier for our clients to be able to see what they’re paying for what they’re receiving. Frankly, this can sometimes play against us when others’ fees may be less apparent or purposely opaque. But right is right, come what may in terms of required disclosures.