You’ve likely heard about the tax rule changes affecting life insurance policies and annuities that begin in the new year. But are you ready for the changes resulting from the Client Relationship Management – Phase 2 (CRM2) regulations? Starting in early 2017, mutual fund clients will receive enhanced mutual fund investment statements that include cost and compensation, and investment performance reports.

Don’t wait until they see a report they may not understand or, even worse, that may upset them. Help clients better understand the cost and compensation, and performance of their investments. Here are some questions your clients may ask, with some responses you could use:

1. I’ve heard about new financial regulations that might affect me. What are they all about?

The Canadian Securities Administrators (CSA) introduced the Client Relationship Model or CRM, which began in September 2009. CRM’s main purpose is to ensure all organizations connected with securities, including mutual fund dealers, are providing complete, true, and plain language disclosure in a timely manner regarding the investments that Canadians purchase. The goal of the second phase, CRM2, is to provide you with enhanced reports on the costs paid to the mutual fund dealer and how your investments perform.

2. What will be the biggest change for me?

Early in 2017, your mutual fund dealer will provide an updated annual statement that shows the costs of your investments and how they’re doing:

a) What you paid: the account charges and compensation section of your statement will help you understand the costs, fees, and other compensation related to the mutual funds you’ve purchased.

b) How your investments performed: the account investment performance section of your statement will show you what you started the year with, your account activity (such as withdrawals, deductions and deposits), and what you have at year-end.

By reviewing these reports, you’ll know if you’re on track to meet your investment goals.

3. Am I paying more in fees/costs as a result of these changes?

No. There are no additional costs or fees to you as a result of these changes.

4. Did we discuss these costs before?

When you purchased your investment, a Fund Facts document and/or a prospectus outlined these costs.

5. How do I pay for my mutual fund investment?

The management expense ratio (MER) is the most common way of measuring the ongoing cost of mutual funds. The investment fund manager, also known as the fund company, uses the MER to establish the charge, and pays a portion to the mutual fund dealer. The MER for a given fund series is based on its total value, and it’s expressed as a percentage. See the hypothetical investment example for Sun Life Granite Balanced Portfolio, Series A, shown below. You don’t directly pay the costs. Instead, they’re deducted from the fund’s assets. These costs affect you, because they reduce your returns.

* As of December 31. Taken from the fund’s most recent management report of fund performance. Shown is the MER breakdown for Sun Life Granite Balanced Portfolio, Series A, using the front-end sales charge fee structure.

With this graph, you can see how the MER affects the management fee (including the trailing commission and investment management fee), operating expenses and tax.

6. How did the dealer come up with my rate of return?

The investment fund manager and the mutual fund dealer use different rates of return calculations:

  1. The mutual fund dealer uses the money-weighted rate of return calculation, which measures the investor’s (your) performance and factors in how much you buy or sell, and when those transactions occur. It’s calculated by taking into account the money moving in and out, giving a greater weighting for those time periods when money is invested in the portfolio. Also called your “personal” rate of return, it’s affected by the size and the timing of any contributions or withdrawals.
  2. Most investment fund managers use the time-weighted rate of return calculation, which measures the investment’s (fund’s) performance, and isn’t affected by timing and amount of buys/sells.

7. For the fees I pay, what does the mutual fund dealer do, and what does the investment fund manager do?

On your mutual fund investment statement, you’ll see the total compensation paid to your mutual fund dealer, which provides:

    • personalized reporting on your accounts,
    • automated tools to speed up transactions,
    • a diverse product shelf, giving you access to multiple fund companies, and
    • records management.

Investment fund managers receive compensation for:

  • providing expert management and daily monitoring,
  • giving access to a wide range of global investments,
  • bringing cost efficiencies, such as relatively low initial and monthly purchase amounts, and
  • offering flexibility so that you can buy and sell fund units when it’s convenient for you.

It’s important to know where your money goes – and what you can expect in return.

8. How do you get paid?

I receive a portion of the amount that the mutual fund dealer is paid. The cost and compensation section of your annual statement details the amount of commission the mutual fund dealer receives to service your account. A portion of that is then paid to me.

9. Why am I still paying fees, even when I have lost money?

The service I provide doesn’t change. Over time, your account value will move up and down, and a loss reflects the current market conditions.

If you’re uncomfortable with these fluctuations, we could spend some time reviewing your investment objectives and risk tolerance to see if things have changed for you.

10. What services do I receive from you in exchange for the fees I pay?

Advisors provide more than investment advice as part of the holistic approach to helping you meet your financial goals:

  • identify and understand your needs, goals and objectives,
  • work with you to develop a plan that helps preserve your capital and protect it,
  • recommend a well-diversified investment portfolio that matches your risk tolerance and investment objectives,
  • update the performance of your investments and rebalance your portfolio,
  • give you insights into the markets, and
  • help you stick to a disciplined investment process.

My experience has shown that this approach has helped my clients achieve financial success. Research also shows the benefits of discussing your finances with an advisor:

Additional resources to help you discuss CRM2:

CRM2 will help you focus on ensuring your clients understand what they’re buying, how much they’re paying for products and services, and how their plans are progressing. These new regulations also present opportunities for you to connect with clients and emphasize the value of your advice.

You might also like…

1 The Investment Funds Institute of Canada, 2012.

2 2016 Sun Life Retirement Now Report.