7 myths about CRM2

As the industry continues to implement CRM2, IFIC busts seven common misconceptions that advisors, and clients, have about the new reporting standards.

Myth #1: CRM2 applies mainly to mutual funds.

Fact: CRM2 applies to all securities, dealers and portfolio managers registered with any Canadian securities commission. The securities commissions are encouraging firms to include non-securities products in client reporting, to the extent possible.

Myth #2: The 2015 statement changes take effect in July 2015.

Fact: These statement changes come into effect December 31, 2015.

Read: CSA releases mutual fund fee report

Myth #3: Investors will begin receiving the two new annual reports as of July 15, 2016.

Fact: The rule comes into effect on July 15, 2016, at which point dealers have one year to begin sending these reports to their clients. In the majority of cases, investors will begin receiving reports early in 2017. This is because most firms are choosing to provide the information on a calendar-year basis.

Myth #4: The report on charges and compensation will tell investors how much their advisor is being paid.

Fact: The report on charges and compensation provides details about the money received by the dealer firm over the previous year to provide services to the investor. A portion of this money is paid as compensation to the investor’s financial advisor. The report on charges and compensation does not provide a breakdown of how much the advisor is paid and how much the dealer firm keeps.

Read: AGF cuts fees on selected funds

Each firm determines this amount differently, based on its business model and split responsibilities between the firm and advisor. Services provided by the dealer firm may include administration, advice and investor protection.

Myth #5: The report on charges and compensation will tell investors the total cost of their investments.

Fact: CRM2 focuses only on the amount paid either directly or indirectly by an investor to the dealer firm. For mutual funds, it does not include the amount paid to the investment manager. For an understanding of the total cost of a mutual fund, investors can review the fund’s MER, which can be found in the Fund Facts document for individual mutual funds, as well as financial statements.

Myth #6: The new report on investment performance will provide benchmarks so that investors can evaluate their personal returns based on a benchmark.

Fact: The report on investment performance will not provide benchmarks. The report focuses on the individual investor’s personal rate of return and this cannot be compared to a benchmark.

Read: Use CRM2 to prove your value

The personal rate of return is based on the individual investor’s specific deposits into and withdrawals out of his account, as well as dividends and interest earned within the account and changes in the value of the securities held within the account. Since each investor has a different combination of deposits and withdrawals, each investor could have a different personal rate of return.

Myth #7: When investors receive their first reports on charges and compensation, they will be surprised to learn how much their dealers are being paid.

Fact: Investors already receive information about dealer compensation, through information presented in percentage terms in the Fund Facts document and in the simplified prospectus. The only change under CRM2 is that these amounts will be provided in dollars and cents and at the account level, rather than just in percentage terms.

The average MFDA account in 2014 was $44,000, while the average IIROC account was $71,000. For accounts consisting of funds with embedded commissions, the average dealer compensation is between 50 to 100 basis points, which is approximately in the range of $225 to $700 annually.