3 core principles of CRM

By Vikram Barhat | April 10, 2012 | Last updated on April 10, 2012
4 min read

With implementation of the Client Relationship Model now underway for IIROC firms, advisors and dealers must put into place greater disclosure regimes and higher standards for product suitability over the next two years.

A panel discussion at the Strategy Institute’s Registrant Regulation Compliance Strategies Summit, held last month in Toronto, discussed some key regulatory changes around the CRM system, performance and cost disclosure, as well as suitability requirements.

Client Relationship Model

The CRM is meant to enhance the advisor-client relationship by clearly delineating the role and responsibilities of the investment professional and building on the standard of care required.

The goal of CRM is based on the three core principles of its predecessor, the fair dealing model: transparency regarding the relationship between the client, the service provider and the firm; transparency regarding performance of the account; and disclosure of conflicts of interest.

“[The] CRM really tries to achieve common standards amongst a number of registrant groups,” said panellist Mark French, manager, regulation and compliance, British Columbia Securities Commission. “Take for example a mutual fund dealer which might manufacture its own funds; contrast that with an advisor who has discretionary advising ability; contrast that with an exempt market dealer.”

The Canadian Securities Administrators (CSA) recently approved IIROC’s CRM reforms which will be implemented in stages, which began March 22, 2012.

The amended rules impose greater disclosure requirements for advisors and enhance the standards of care as it relates to the suitability of investments for clients.

Performance reporting

Performance reporting is a very complex process and will take time to build, said William Donegan, chief compliance officer, Scotia Securities Inc.

“The main issue with performance reporting is working out a lot of the details to define cost,” he said. “When you’re talking about performance reporting, you’re talking about altering the customer face of your client facing document.”

One of the big issues, he added, is the amount of time and effort it will take to implement.

Cost disclosure

Cost disclosure is an even more complex undertaking, said Donegan.

“Part of it deals with disclosing annually what the fees are worth for the account,” he said. “It becomes more problematic on the mutual fund side, when we start to talk about disclosing trailing commissions earned on an annual basis.”

There’s a substantial amount of work to be done at the manager level, the FundServ level and at the dealer level, in order to build the technology that will enable cost information to be delivered to a customer statement.

Donegan said there’s also the fundamental ethical issue to consider.

“Trailing commissions are not really a cost; the cost on a mutual fund is really the MER,” he said. “Customers receiving information about their dealer getting money from a mutual fund investment may be confused into thinking that mutual funds are actually a more expensive product or have more fees attached to them, simply because the other products and investments that investors buy are not required to provide that level of disclosure.”

Mutual funds would stand in stark contrast with fixed income investments, like GICs, which have embedded costs, but no reporting requirement.


A big part of the CRM is the subject of suitability assessment.

“We at the BCSC are certainly seeing suitability assessment as an area of great concern,” said French. “Just about every examination we do has some component of suitability that’s [been ignored].”

The experience of other regulators has been the same. They are hearing compliance officers in various organizations express concern over what their staff are doing.

“It’s safe to say that we’ll see this as an area of consistent focus going [forward], possibly even a sweep,” said French. “And there will certainly be more guidance from regulatory organizations on the topic.”

Many firms feel ongoing suitability requirements are onerous and create undue pressure that comes with expensive system changes.

“If you get into the concept of ongoing suitability, it becomes very difficult to manage because the situation is one where a significant market correction may impact the suitability of an account,” said Donegan. “How do you define that correction?”

Further, he expressed concern over the cost of developing a system that can monitor all the accounts across the company.

“That would be a very complex effort from a manpower point of view and [will require] a very complex piece of technology to have in your system,” said Donegan.

He expressed hope that regulators will not go any further on the issue than they already have.

Vikram Barhat