TORONTO, Jan. 31, 2017 /CNW/ - This backgrounder has been prepared to provide journalists and others with accurate information about two new personalized annual reports that investors are beginning to receive this month under CRM2 – new reporting requirements set in place by the Canadian Securities Administrators that are summarized at the end of the document.
The primary purpose of the backgrounder is to address frequent factual errors observed in media coverage about the content of the new reports.
In July 2015, IFIC's first CRM2 Myths and Facts backgrounder helped clarify many aspects of the rule for journalists and investors. The 2017 version repeats a few of the original myths and introduces several others that are relevant today.
Myth #1: CRM2 applies mainly to mutual funds.
FACT: CRM2 applies to more than mutual funds. It applies to all securities and applies to all 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: Investors will receive two new reports this month.
FACT: Dealers have until July 14, 2017 to begin sending these reports to their clients. In the majority of cases, investors will begin receiving these reports in the first quarter of 2017. This is because most firms are choosing to provide the information on a calendar-year basis (January to December).
Myth #3: The industry does not want investors to know how much they are paying.
FACT: Studies have shown that more than half of mutual fund investors are already aware of their fees and discuss fees with their advisors. As CRM2 is implemented, this number is expected to rise.
The investment funds industry fully shares the regulators' goal to provide this new information to clients. The information will strengthen investors' understanding of their investments and improve investors' conversations with their advisors. These are positive outcomes.
IFIC is launching a social media campaign: "It's your money. Find out more." to help raise investor awareness.
For more information: A Toolkit for Dealers and Advisors
Myth #4: The new report on investment performance will provide benchmarks so that investors can evaluate their personal returns based on a benchmark.
FACT: In most cases, 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.
The Personal Rate of Return is based on the individual investor's specific deposits into and withdrawals out of his/her 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.
Benchmarks help evaluate the performance of a fund over a time period, which can be compared to other funds. However, benchmarks do not take into account the timing of an individual investor's day-to-day deposits or withdrawals.
For more information: Understanding Investment Performance
Myth #5: 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 may be paid as compensation to the investor's financial advisor. The report on charges and compensation does not provide a breakdown of how much is paid to the advisor and how much is kept by the dealer firm. Each firm determines this amount differently, based on its business model and split in responsibilities between the firm and the advisor.
Services provided by the dealer firm may include (1) administration (e.g., processing transactions, preparing quarterly account statements and other reports, product review, etc.), (2) advice, i.e., the expertise an advisor provides to investors, such as helping them determine their financial needs, investment objectives and risk tolerance, providing suitable product recommendations and portfolio construction, and ongoing review, meetings, account monitoring and portfolio rebalancing, and (3) investor protection, which includes supervising accounts, conducting trade suitability reviews, and ongoing account reviews.
For more information: Infographic: Value for your mutual fund fees
Myth #6: 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 management expense ratio (MER), which can be found in the Fund Facts document for the individual mutual funds, as well as a fund's financial statements.
For more information: Understanding Services and Fees
Myth #7: Investors will have sticker shock when they learn how much their dealers are being paid and this will lead them to switch to less expensive products.
FACT: Predictions of investor "sticker shock" are largely exaggerated. The average MFDA financial advisor channel account at the end of 2015 was approximately $46,000. 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 $230 to $460 annually.
Cost is not the only factor that goes into a purchase decision. As investors become increasingly knowledgeable, their confidence in investment funds will grow because of the strong benefits that they offer Canadians. Investment funds provide unique access to capital markets, allowing individuals to diversify their investments across a wide spectrum of asset classes and geographic areas without having to set aside the time and develop the expertise to build their own portfolios from scratch.
There is no other product that offers the same combination of opportunity, flexibility and protection.
Myth #8: Mutual funds in Canada are among the most expensive in the world.
FACT: This claim first appeared in a 2011 Morningstar report, which became a source for other reports and commentators. However, in 2015, Morningstar published an update that concludes that a more proper comparison would place Canada at: "the top half of lower fee markets" in the 25 countries that were studied.
The flaw in the original analysis was a failure to recognize a key difference in the expense ratios reported in different countries. In Canada, published expense ratios generally include the cost of advisor services. In the U.S. and several other countries, most investors pay an additional fee for advisor services, and this fee is not captured in the reported expense ratio. To properly compare expense ratios with Canada, the advisor fee must be added to expense ratios in other countries.
Comprehensive research conducted in 2012 and 2015 by independent research firms in the U.S. and Canada showed conclusively that costs to advised investors on both sides of the border are almost identical: 2.02% (before taxes) in Canada and 2.0% in the U.S.
For more information: Monitoring Trends in Mutual Fund Cost of Ownership and Expense Ratios A Canada-U.S. Perspective – 2015 Update
Myth #9: Advisors are not ready to talk to clients about the new reports.
FACT: The industry has worked hard over the past three years to familiarize advisors with details of CRM2 and provide plain language materials for investors. Firms developed new business processes and systems to accommodate the rule. Fundserv Inc. undertook substantial network upgrades to facilitate a new functionality that enables fund managers to report trailer fees and commissions at the investor account level and provide distributors with the necessary details to prepare and test new cost and performance reports to meet CRM2 requirements.
Extensive training of advisors and staff took place over the past few years, including a CRM2 module made available at no charge by IFSE Institute to teach financial advisors about disclosure requirements and advisor obligations under CRM2.The industry worked together through IFIC to produce an extensive series of tools and documents (several of which are listed below) to significantly enhance public/investor understanding.
For more information:
Advisor Insights: Answering Your Clients' Questions about the Performance of their Investments
Advisor Insights: Answering Your Clients' Questions about Services and Fees
Advisor Insights: An Opportunity to Strengthen Your Relationships with Clients
Infographic: Value for Your Mutual Fund Fees
Website material for investors: Understanding Investment Performance
Website material for investors: Understanding Services and Fees
Continuing Education Module on CRM2 Requirements
Infographic: Reach Your Financial Goals
Advisor Insights: Advice Creates Strong Value for Canadians
Advisor Insights – CRM2 Myths and Facts
Model Report on Charges and Compensation: CRM2 – 2016 Requirement (April 13, 2015)
Model Report on Investment Performance: CRM2 – 2016 Requirement (April 13, 2015)
Advisor Insights – Benchmark Disclosure (IFIC) – IFIC-branded
Advisor Insights – Pre-Trade Disclosure (IFIC) – IFIC-branded
CRM2 ("Client Relationship Model – Phase 2") is the name of set of rules developed by Canada's securities regulators to make it easier for Canadians to understand how their investments are performing and how much they cost.
In the final stage of CRM2, investors will begin receiving two new annual reports – one on dealer charges associated with their investments and the other on investment performance. Companies have the option of incorporating this information into their clients' account statements, or providing it in the form of separate reports. As noted above, most mutual fund investors will begin to see these reports early in 2017.
CRM2 was preceded by CRM1 (known simply as "CRM" at the time). The purpose of CRM1 was to provide disclosure to clients at the time that they opened their accounts regarding aspects of the relationship, including any conflicts of interest that might exist. CRM1 went into effect with the implementation of National Instrument 31-103 and subsequent rule amendments by the MFDA and IIROC. CRM2 builds on this disclosure by providing clients with annual reports indicating how the individual client's investments have performed, and what compensation the dealer has received.
SOURCE The Investment Funds Institute of Canada
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