The History and Background of CRM Phase 2 [Video]

By Adam Laird on June 11, 2015

On July 15th, 2016 the Canadian financial advisory community will undergo a drastic change – a change that will shape its revenue model forever. This transformation will be a result of the implementation of the Client Relationship Model (Phase II), “CRM2”, put into force by all provincial and federal regulators in Canada.

Although the CRM will take effect in many steps, the largest effect comes on July 15th, 2016.

What Happens on July 15, 2016?

On this date, all investors must be provided an annual summary of all charges incurred, including all trailing commissions, referral fees and other compensation received by the dealer that relates to the client’s account.

There will also be a mandatory annual account performance report, which will include the annualized total percentage return for the client’s account, with text, tables, charts, explanatory notes and definition of total percentage return.

What Is the Purpose of the CRM?

The CRM is a combination of failing attempts by financial regulators to enact appropriate disclosing techniques and ethical processes amongst the financial advisory community.

Watch the Explanatory Video Below

A History of Regulating Investment Funds in Canada

In January 1995, Glorianne Stromberg, an Ontario Securities lawyer and former Commissioner of the Ontario Securities Commission, was asked to publish a report entitled Recommendations for Regulating Investment Funds in Canada. This publication was the first of its kind in Canada and led to the creation of the Mutual Fund Dealers Association of Canada, a self-regulatory organization (SRO).

Throughout 1995, Glorianne toured Ontario universities and associations to bring awareness to the publication. Her efforts were spoiled by strong backlash from the Big Banks and investment dealers operating at that time. Given the fact that investment markets were at the tail end of one of the greatest bull markets between 1982 and 2000, Glorianne had little support from those she was trying to protect.

After the turn of the century, smooth profitable markets became a thing of the past, as negative events produced infamous financial headlines and caused great damage to global financial markets.

The information technology crash of March 2000, the September 11th attacks on the United States in 2001, and the global recession following in 2002 led to regulating initiatives finally gathering steam. For example, the Fair Dealing Model, an initiative that piggybacked on Glorianne’s original publication, was published nine years later in January of 2004.

Similar to Glorianne’s uphill battle, the Canadian markets adopted back to its profitable ways. The Fair Dealing Model was also shelved due to its lack of support from those it was trying to protect.

On September 15th, 2008 the venerable investment bank Lehman Brothers went bankrupt and consequently the whole global financial system seemingly went with it.  Investors all over the country lodged complaints against their financial advisor or investment dealers due to the unknown risks they were taking.

The collapse of the financial system proved to be the catalyst for true Canadian regulation. 

Since the turn of the century, the Canadian Securities Administrators, IIROC and the OSC have been trying to deliver regulation to the industry; however, the Big Banks and other investment dealers have successfully combatted it. Finally, with the crash of 2008, inappropriate dealings and advisory practices were greatly exposed.

The industry as a whole, regulators and capitalists, agreed that appropriate regulation needed to be implemented. The evolution of Glorianne Stromberg’s publication to the Fair Dealing Model had now been renamed to the Client Relationship Model or CRM.

More importantly, firm dates were agreed upon for implementation:

July 15th, 2013 – Amendments to Relationship Disclosure Information (RDI)

Enhanced Relationship Disclosure Information at account opening including:

  • Discussion of the costs of investing, particularly the costs of mutual funds
  • Description of operating and transaction charges
  • Requiring that any new or increased operating charge needs 60 days advance written notice to clients

July 15th, 2014 – Pre-Trade & Enhanced Trade Confirmation Disclosure

  • Oral or written pre-trade disclosure of all charges paid by client when buying or selling a security (including DSC and trailing commissions)
  • General description of how benchmarks might be used and whether the firm offers any options for benchmark reporting to clients
  • Specific disclosure for scholarship and plan dealers
  • Enhanced trade confirmation disclosures

July 15th, 2015 – Expanded Account Statements

Nominee and/or client name securities – quarterly account statements with additional disclosure on:

  • Market value for each security
  • Identification of which securities are subject to DSC
  • Name of applicable investor protection fund
  • Specified information about the “cost” of each position (either book or original cost)
  • Name of the party that holds or controls each security and a description of how it is held

July 15th, 2016 – Annual Charges, Compensation and Performance Reports

Annual report of charges and compensation – mandated disclosure to include:

  • Firm’s current “operating charges” that apply to the account
  • Total amount of each type of “operating charge” and “transaction charge” paid by the client for the previous year, along with the total aggregate amounts
  • Specified disclosure about compensation paid in connection with debt securities
  • Specified disclosure about commissions payable by scholarship plan subscribers
  • Total amount of payments to the firm or any of its registered individuals with an explanation of each type of payment
  • Amount of trailing commissions recede in respect of the account, with specified mandated disclosure

Annual investment performance report– mandated disclosure to include:

  • Specified information, including market value at the beginning and end of the period, market value of money and securities transferred in and out of account, annual change in value, the cumulative change in value
  • Annualized total percentage return – for one, three, five and ten year periods (and since inception if less than ten years)

CRM2 Mitigates Damages of Future Financial Dangers

Today, these specific dates are essential. Since the 2008 crisis, and consequently this long awaited reform agreed upon by both regulators and their counterparts, the global markets again experienced a dramatic profitable rebound. This rebound has brought another round of arguments and complaints that these regulations are no longer necessary.

In the past, the concept of favourable returns for clients has trumped all efforts for regulation because the majority of market participants were making money. The idea of not wanting to aggravate the current system speaks to the delay and resistance for necessary regulation.

The Client Relationship Modell (Phase II) is a reactive measure caused by previous recessions but is also a proactive tool used to mitigate damages of financial dangers in the future. By having concrete execution dates, it has fended off the typical resistance of greed and exuberance.

For Glorianne Stromberg, it has been 20 years in the making to witness simple rules of disclosure and transparency to be put into place.  Now, these regulations are greatly changing the financial advisory community for the better as well as re-shaping an industry in desperate need of a new way to properly conduct business.

>> HighView Financial Group is an investment counselling firm that takes a fiduciary approach to affluent family and foundation wealth. We are transparent and accountable in all that we do. Schedule a complimentary discovery session to see if we’re the right investment stewardship counsellors for you.

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Adam Laird

As Vice President & Principal at HighView, Adam Laird focuses on advising high net worth families about wealth management. He is an expert in CRM2 and a champion of goals-based, transparent, and objective investment counselling.
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