There's a pretty good chance you've never heard of CRM2, but if you're an investor, you should familiarize yourself with the basics to avoid any confusion when you get some weird statements in the New Year. Let's first get the acronym out of the way (finance people sure love a good (bad) acronym); CRM2 stands for the 'Client Relationship Model part 2'. And what it means for you is more transparency when it comes to the fees you pay for your investments and the returns you are earning on said investments. Sounds great right? Yes, it's a good thing, but there are some factors you need to keep in mind when you're evaluating the new reports. You may have heard some negative opinions regarding CRM2 and financial advisors complaining about how it's going to ruin them...it's not, or at least it shouldn't. The advisors who are most concerned about the effects of CRM2 are the problem children that have made it necessary in the first place by not properly disclosing fees and manipulating performance data.
The new CRM2 model was implemented on July 15, 2016 but all investment firms were given one year to gather the necessary data before they had to start sending the reports to clients....that would bring us to July 2017. So why are we talking about this now? Well, a lot of firms in the industry have decided it's easier to run the numbers based on the calendar year, so most of you will see the more detailed statements hit your mailboxes (inboxes) in January.
Fee Disclosure - How much are you actually paying?
The biggest factor in this is likely to be the cost transparency. As investors, we pay certain fees to get into the market, and these include commission charged directly by your advisor, mutual fund fees, administration fees charged by your financial institution and taxes. Some of these fees you'll be aware of but others, like the mutual fund fees, have always been embedded within the investment and not openly disclosed. Now you'll get a neat little print out of everything you have paid to your to your financial institution. One thing to note if you've got an advisor you work with is that they are not lining their pockets with all of that money...a lot of what you pay will go back to the bank or dealer they work for.
This is a change for the better but maybe take a deep breath before you read the actual dollar amounts. Your advisor may be really open about fees but only ever talk about them as a percentage of your portfolio. A 2% fee on a $100,000 portfolio might not sound like much, but that's $2,000/year...how are those the same thing right?! It helps to think about all the things your advisor provides for you...maybe they prepare financial plans (they should be!), maybe they run free seminars, maybe they give you advice to reduce your tax bill, or can walk you through your pension plan. All of these things would cost you money if you went to a fee for service planner....we're talking $500+ to get a comprehensive financial plan.
There is an exception that you won't find on the new reporting and that's mutual fund MER's (management expense ratios). These fees are charged directly by the fund company and are their cost of doing business. Because they aren't paid out to your advisor/dealer, they are exempt from CRM2. The MER will depend on the fund with more aggressive funds usually charging higher fees (more active trading); a bond fund will usually cost between 1% and 1.5% while an equity fund will be >2%. MER information is included in the 'Fund Facts' document you should receive before purchasing a mutual fund. You will see information regarding trailer fees (what the mutual fund company pays your advisor for buying the fund) and DSC (deferred sales charges). DSC funds are bad news, and a lot of firms are moving away from them, so if you're being pushed towards in that direction, you might want to run away.
Performance Disclosure - How much are you actually making?
The whole reason you invest your money is to make more of it, so you want to see your statement balances going up, up and up some more. Naturally, this doesn't always happen, you're going to have some bad months or even years, but over the long term, you want to be growing your net worth. The new performance disclosure with CRM2 is going to give you easier access to that information on a more standardized level. Prior to this, dealers could choose their method of calculating your returns, but now all Canadian dealers have to use a money-weighted calculation...I'm not going to go into detail about that here, but you can read this article if you'd like more info. You will now be given annual information that includes any deposits and/or withdrawals from your accounts, the change in dollar value of your account, and rates of return based on the last one, three, five and ten years. Because this initiative was only introduced in July of 2013, the dealer only needs to go back to this point so you won't be seeing a five or ten-year return in 2017. These values will also be impacted by how long you have held your investments with your current firm if you've only been a client for two years your returns will only date back that far.
Seeing positive returns on your statement is great, but you have to keep your risk level in perspective. If you're a low-risk investor you cannot expect to see double-digit returns on either the positive or negative side and shouldn't be disappointed with returns under 5%...if you put that money in a 100% safe savings accounts, you'd be lucky to get 1%. Also, keep in mind how the market has done as a whole. If an appropriate benchmark (an index with similar investments to yours) is sitting at -20% for the year and you're at -8% you really didn't do so poorly did you?
It can be frustrating to see all the fees you are being charged in a year when your returns are low but as long as your longer-term returns are positive and your advisor is providing you with services you feel are important you shouldn't stress about it too much. However, if you see poor returns year over year, it might just be time to look for a new strategy.
Those are the basics of the new CRM2 model if you have any questions feel free to leave them in the comments. And keep an eye on your January (or maybe July) investment statements to see the new detailed reporting.