What it means
Before these rules, many investors had little idea how much their adviser or fund company was actually taking in fees. Charges were often buried inside fund returns and described in percentages that people found hard to translate into real money.
CRM2 was designed to change that by forcing firms to show the cost in plain dollar terms. Under the model, firms must give clients a report on charges and other compensation each year.
It lists the fees paid for account administration and for advice, as well as the dealer's share of ongoing payments that fund managers make for the sale of their products (often called trailing commissions). The goal is that the client can see, in one place, what the relationship cost over the year.
The second pillar is performance reporting. Clients receive statements showing the value of their account, the money they added or withdrew, and the investment return over one, three, five and ten years or since the account opened, where available.
The return is shown on a money-weighted basis, which means it reflects the timing and size of the client's own deposits and withdrawals. The rules also cover how firms must disclose conflicts of interest and describe the services they provide.
A client should be able to read the paperwork and understand who is acting for whom, and what the firm earns when particular products are sold. For finance professionals, CRM2 is a good example of how regulation can shift behaviour without banning anything.
Once costs are visible, clients compare, negotiate and often move towards cheaper products, which pushes the whole industry towards more transparent pricing. It is specific to Canada, so investors elsewhere will see different but similar disclosure regimes.
Anyone relying on the detail should check the current requirements with the relevant regulator or their firm.
In practice
Real-world examples.
Example
A retired teacher receives her first annual charges report and discovers that she paid $2,400 in fees on a $200,000 portfolio. Seeing the number in dollars prompts her to ask her adviser whether lower-cost funds would suit her needs. The conversation leads to a smaller fee and a clearer explanation of the service she receives.
Example
A young software engineer sees from his performance report that his five-year return is lower than he expected once his regular deposits are taken into account. He uses the report to ask his adviser whether his portfolio is invested too conservatively for a long-term goal.
Example
A compliance officer at an investment dealer builds a process to produce the annual reports for thousands of clients. She checks that every fee, including trailing commissions, is captured in the right place and described in the required plain language.
Formula
Calculation
Dollar change in account value = Ending value - Beginning value - Net deposits
Total cost as a percentage of assets = Total annual charges / Average account value x 100
Worked example: an investor begins the year with $100,000, deposits another $10,000 and ends with $118,000.
Dollar investment gain = $118,000 - $100,000 - $10,000 = $8,000.
The annual charges report shows total fees of $1,200, and the average account value was $120,000.
Total cost as a percentage = $1,200 / $120,000 x 100 = 1.0%.
The statement lets the investor see that, of a gross gain of $8,000, a charge of $1,200 was paid in costs, which is the kind of clarity the rules were designed to deliver.Case study
Seen in the real world.
Maple Ridge Advisors is a fictional firm, and this story is illustrative only. Before the new rules took effect, the firm charged clients a blended fee that was hard to see on their statements, and few clients ever asked about it.
When the annual charges reports went out, several clients telephoned to ask about line items they had not noticed before. The firm's managing partner realised that the old pricing was difficult to defend now that clients could see the dollar amounts, and he reorganised the fee schedule into a single, transparent advice fee.
Within a year, client complaints about costs dropped and several clients said the clear statements made them trust the firm more. The managing partner concluded that disclosure had forced a healthier conversation about value.
Watch out
Common mistakes.
- Thinking CRM2 limits what advisers can charge, when it only requires that the charges and compensation be disclosed clearly.
- Confusing the money-weighted return on a statement with the headline return a fund advertises, which does not reflect your own timing of deposits and withdrawals.
- Ignoring the annual charges report, which is the one document that shows exactly what the relationship cost you in dollars.
Questions
People also ask.
Who is covered by CRM2?
Investors in Canada who hold accounts with registered dealers and advisers, and the firms that serve them.
What does the performance report show?
The account's value, deposits and withdrawals, and the investment return over several periods, so clients can judge whether they are on track.
Does CRM2 apply outside Canada?
No, it is a Canadian regime, although other jurisdictions have introduced comparable fee and performance disclosure rules.
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