CRM2’s three-year implementation has begun. By now, most brokerage firms, banks and advisors have met the first set of requirements that took effect in July, including expanded relationship disclosure information and pre-trade disclosure of charges.

But CRM2’s most difficult requirements lie ahead. Planning for 2015 and 2016’s requirements is an enormous task, in part because no firm can afford to interrupt business to focus solely on CRM2. Each new requirement must be integrated seamlessly into the regular flow of trading, operations and client-relationship management. Firms, banks and advisors have identified the following as the most significant challenges:

  • achieving seamless integration with books and records;
  • implementing a dollar-weighted (internal rate of return) performance engine;
  • fulfilling the client-name reporting requirement; and

  • understanding the impact of moving to bid-and-ask pricing, while conforming to cost and timing requirements.

Here’s what you have to do by July 15 of next year:

  • Client-name reporting. By summer 2014, each firm should have determined whether they have client-name/off-book business, and the policy for recordkeeping and reporting those accounts. While
    client-name reporting may be a relatively simple concept, each firm’s policy, platform and operational framework also must address methods for capturing necessary data, recordkeeping, operational processes, training of operations staff and advisors and account-
    reporting content and format.

The rest of the to-do list is driven by the firm’s client policy framework. Firms should ensure that list is thorough, well-reasoned, well-documented, and incorporates time for uncertainties, emergencies and holidays. Here are the specific requirements for client-name reporting:

  • Next is client-name securities accounts. Some firms don’t know how many client-name accounts they have; others are unaware they have them at all. Typically, between 3% and 5% of accounts firms have are in this category. Over the next few months, all firms should run a system query to determine exactly how many they have, as identified by FundSERV codes 1 (client name) or 3 (intermediary). This will help firms make decisions on how to service these accounts, or whether to transfer them to another firm or division. Our preliminary analysis has revealed some divisions don’t have the capabilities to meet CRM2 requirements for these accounts.
    Firms must establish procedures for KYC suitability reviews for client-name accounts they retain. This may mean assigning a team to contact each client to fill out a new application, including detailed suitability information. It’s a chore, but potentially a great opportunity for
    re-engaging clients and capturing assets.
  • Original or book cost. In 2015, firms have to report a security’s cost basis on
    client statements, and a documented policy is also required. CRM2 allows firms to assign the market value as of July 15, 2015 as a cost basis. That’s a Wednesday—not a natural valuation day for brokers using weekly or monthly pricing. If a firm wants to value some funds weekly (e.g., at close the preceding Friday), it must have a policy documenting this decision.

Practical guidance

  1. Executive sponsorship. Firms should designate a sponsor responsible for seeing the CRM2 implementation process through. Pick someone who can deliver strategic insights and has a strong understanding of how these changes can be used to differentiate the firm from competitors. The sponsor must be able to allocate appropriate resources to implementation, and have a well-considered budget for seamless integration of all requirements.
  2. Break down the regulations. CRM2’s written into separate streams of regulation, easily identified by section number. For example, 200.1 for securities valuations; 200.2 for account statements and client-
    name securities accounts. Assign a leader to each stream, giving him or her authority to make decisions quickly and with adequate resources. Under each leader, assign project managers to direct teams and meet deadlines.
  3. Evaluate staff capabilities. Some firms have enough staff to handle CRM2 compliance and implementation; others don’t. Evaluate your staff’s capabilities and be ready to hire or train people.
  4. Recognize what must be done internally. Each firm must take responsibility for interpreting CRM2 and creating policies. Although it isn’t always clear whether the rules are prescriptive or interpretative, a firm’s top-level policy decisions can’t be outsourced.
  5. Consider a third-party provider.Selecting a partner with the required expertise can help ensure success. Securities valuation policies tend to pose the biggest challenge. Once a firm’s valuation policy’s documented, a third-party provider can draw on expertise in software development and understanding of valuation nuances to implement it. Having outside experts handle the technological side allows firms to focus attention on using CRM2 as an opportunity to attract new clients and enhance established relationships.

CRM2 is a challenge. But intelligent firms also see it as an opportunity to bring transparency to investors and grow AUM.

Earn CE credits and learn more about CRM2

Here’s an excerpt from our course “Understanding CRM2’s performance reporting requirements.” Take it at

When advisors and dealers start to release performance reports under CRM2, there is a very real risk that investors will misinterpret the information. Make sure that your clients understand the uses and limitations of the performance report, and of performance information generally, in the following ways:

  • Investors should use the money-weighted returns in the performance reports mandated by CRM2 to evaluate their progress towards their investment objectives. A suitable benchmark for this purpose would be the target return in their personal financial plan. If the actual return trails the target return over a reasonably long period of time, this may indicate a need for corrective action on the part of the investor.
  • They should use time-weighted returns provided by portfolio advisors and investment funds, allowing for differences in risk and liquidity, to decide which advisors or funds to use for their portfolios. Advisors can be compared with their peers and funds with other funds in the same category. Advisors can also be judged against a composite benchmark based on the investor’s target asset allocation. Funds can be judged against a benchmark that reflects their mandates. If an advisor or a fund underperforms over a reasonably long period of time, this may indicate a need for replacement.
  • By comparing their personal (money-weighted) return with the advisor’s or fund’s (time-weighted) return, investors can ascertain how their own decisions are contributing to their portfolio’s overall performance. If the money-weighted return trails the time-weighted return, hopefully it will motivate them to adopt better investing practices.

By Paul Strijckers, vice-president of business solutions at Broadridge.