A range of industry figures working in the Canadian wealth management sector recently explained regulatory changes designed to make the sector more open, mirroring developments in countries such as the UK.

Equipos, a provider of private client reporting technology and communication tools, rolled out an educational initiative earlier this month to help Canadian firms understand changes brought about by phase two of the Client Relationship Model, effective this July.

The aim of CRM is to enhance investor protection in Canada through improved relationship disclosure, conflict management, and suitability and account performance reporting. Phase 2, known as CRM2, is focused on enriching investors’ understanding of the cost and performance of their investments.

Co-sponsored by WealthBriefing, the programme launched on 9 April with a webinar during which panellists walked through the details of CRM2.

Mike Hendy, vice president of North America at Equipos, moderated the webinar, which also featured: Drew Brown, associate vice president at TD Wealth; Rebecca Cowdery, partner at Borden Ladner Gervais; Karim Manaa, partner at Deloitte; and Grace McSorley, executive director of business risk, regulatory affairs and governance at CIBC.

By way of background, Canadian buy-side investment management firms will - as required by the Canadian Securities Administrators - have to provide pre-trade disclosure of charges and disclose their compensation from debt transactions in trade confirmations as of July 15, 2014.

Next year, enhancements to client statements will be introduced, while in 2016 firms will be required to produce annual reports on charges and other compensation, as well as an annual investment performance report.

Andre Fok Kam, a consultant to the securities industry in Canada, told this publication that the main beneficiary of CRM should be retail investors who will be better able to evaluate the costs and benefits of using an advisor.

“Although advisors’ initial response to CRM2 was rather less than enthusiastic, they are beginning to wake up to the marketing opportunities it provides. There is a growing body of evidence that investors who use advisors have better returns than those who don’t. The mandatory disclosure of personal rates of returns will help quantify that gap,” he said.

But, ultimately, it will be up to advisors to demonstrate the value of their advice.

Expect questions
Hendy kicked off the webinar by asking Cowdery to outline exactly what CRM2 is and whom it will impact.

The first stages of CRM - which are already effective - were “more modest,” Cowdery said.

The central concept was that firms should explain in writing to their clients what kind of services they can expect to receive from their advisors. Requirements included ensuring that products recommended were suitable, as well as rules on managing conflicts of interest.

“But with CRM2, what we have seen is a real sea change,” she said.

“Perhaps the biggest change that will affect so many people in the Canadian financial services industry is the pre-trade disclosure, which can be given orally by advisors to their clients before any trade goes through,” Cowdery continued.

Next year will bring additional requirements for account statements but 2016 “will be our big year,” with the annual reports coming into effect, she said.

As a result, Manaa anticipates that clients will ask a lot of questions about costs and performance because “this is really the major change they will see with respect to their statements.”

With CRM2 increasing transparency, they may ask for a breakdown of fees, for example.

In terms of performance, CRM2 requires a dollar-weighted rate of return rather than the traditional time-weighted method, which may confuse clients who are used to calculating their returns in a certain way.

They will probably ask why it is different and what has changed, Manaa said. “There is a lot of work that needs to be done…to explain and provide all the answers.”

Likewise, Brown believes that the information CRM2 is requiring will make financial statements “a lot more relevant” to clients and in turn drive more questions.

Culture change
McSorley said CIBC is “welcoming all the changes” brought about by CRM2. Transparency is “very good for the industry” and will help clients understand what they’re paying for, she said.

Cowdery noted that understanding the aims of CRM2 will enhance the customer experience while also minimising misunderstandings between the client and the firm.

On the other hand, as McSorley highlighted, many advisors are already CRM2-compliant, in some respects, as they have fee-based accounts and thus disclosing such information is already part of their work culture.

“For other people this will be a change of management experience and so we are working on very tactical education,” McSorley said.

There is of course a great need to equip investment advisors with the language and ability to explain some of the new concepts to clients because “it’s not simple,” she added.

Hendy asked Brown about the physical challenges of compliance, in terms of reporting and collecting data, for instance.

“Probably the biggest challenge within TD Wealth is that we actually have seven lines of business all needing to comply with the regulation, all with different books or records and perhaps different gaps that exist for CRM2,” Brown said.

From a reporting perspective, Brown said CRM2 has provided his firm with an opportunity to ensure it delivers a “consistent quality of reporting.”

While technology is a “significant hurdle,” he acknowledged that it will probably be a challenge for everyone.

The client-advisor relationship
During the webinar, a participant asked how CRM2 will affect the client-advisor relationship, in response to which McSorley said it will call for a heightened level of dialogue between the two.

Investment advisors will really have to know the client, she said. “It is definitely I think the biggest cultural shift for investment advisors in terms of dealing with their clients.”

However, for some it will be business as usual, she noted.

Hendy concluded the webinar by asking the panellists: “If you had one piece of advice for the wealth and asset managers in the audience regarding CRM2, what would it be?”

“The short answer is start early,” said Brown, adding that CRM2 shouldn’t be viewed purely as a compliance exercise.

He warned that the various changes should be approached as a whole - as a programme not a project - rather than tackling the new rules individually. The initiatives for 2015 and 2016, for example, are the bigger pieces of the puzzle.

McSorley agreed with Brown that starting early is paramount. She also advised to “communicate often” – at both the advisor and client level – while equipping advisors with the tools they need to effectively explain the changes.

In the words of Cowdery, CRM2 “really does have to be embraced at the client service level.”

She also emphasised the importance of thinking about CRM2 in the wider context of regulatory initiatives focused on ensuring that retail clients understand what they’re investing in.

“If it’s done properly I think it will bolster the Canadian financial services industry,” she said.