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CRM2: How New Disclosure Rules Will Benefit Investors

There always seems to be some bad news if you’re an investor. But there will actually be some good news this summer. Starting in July, investment advisors and mutual fund companies (among others) will have to be more transparent about how well your investments are doing and how much money you’re paying in the process. It’s a big step forward because right now many individual investors are in the dark.

Within the investment industry, the new changes are usually referred to as CRM2. This acronym stands for Client Relationship Model-Phase 2. Technical as it sounds, it’s just the title of new requirements affecting mutual funds and investment advisors in Canada.

The new disclosure rules follow earlier efforts at upping transparency. As the Ontario Securities Commission (OSC) explains, those changes included providing pre-trade disclosure of charges and expanded account statement requirements.

Enter CRM2

The new changes, as detailed by the OSC, require investment firms to:

  • provide an annual report on charges and other compensation that shows, in dollars, what the dealer or adviser was paid for the products and services it provided; and
  • provide an annual investment performance report that covers
    • deposits into, and withdrawals from, the client’s account;
    • the change in value of the account; and
    • the percentage returns for the previous year and the previous three, five and 10 years.

CRM2 will benefit investors in two ways. First, their advisor or money manager will have to be upfront about how a portfolio is performing. This must be disclosed both in absolute terms and on a percentage basis. Investors will also be able to see how they’re doing historically.

Second, investors will learn more about how much they are paying in fees. As Morningstar’s Rudy Luukko notes in an article about CRM2, the report to clients must “itemize the cost of everything from embedded trailer-fee commissions, to redemption fees, point-of-sale commissions, switching fees and RRSP administration fees, and provide an aggregate dollar figure for the 12-month period.”

Here’s why this is so important. Let’s say your investment advisor recommends you buy a mutual fund with a high management expense ratio (MER). For example, on an investment of $10,000, an MER of 2.5% will mean that you’re paying $250 annually to the mutual fund company. However, it’s possible your advisor will receive a commission (called a trailer fee) in order to sell you that fund. The trailer fee is paid by the fund company to your advisor as compensation for putting you into a particular fund. In some cases, this can amount to 1%.

What trailer fees do is raise a potential conflict of interest. On the one hand, you expect your financial advisor to look after your best interests. But with mutual funds, there’s a clear incentive to recommend products that come with a juicy commission. What CRM2 does is spell out for the investor how much they’re paying in the way of these types of fees.

Fees affect returns

It’s a simple concept but one that investors should always keep in mind: The more you pay in fees, typically the less you’ll have for yourself. In other words, higher fees generally equal lower returns.

Over the course of a year, this may not seem to matter too much. But as the Toronto Star’s Adam Mayers reminds us in a piece about CRM2, the little things such as fees do add up over time. In his example, he provides a graphic showing how much money an investor can lose to higher fees. In his scenario, a person can invest $6,000 a year with fees of either 2.4% or 1%. Assuming a 5% annual return over 40 years, someone who pays 1% in fees will have retirement savings of $605,689, whereas the investor paying 2.4% in fees will end up with only $434,872.

The bottom line

Many investors probably don’t look at their investment statements on a regular basis. With new disclosure requirements, now’s a great time to start taking a hard look at how your investments are doing and how much you’re paying in fees. It may be that your advisor is doing a great job. But it also might be time for you to make a change.

For other investment options, be sure to compare the best GIC rates and check out the best high-interest savings accounts.

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Flickr: Got Credit