Client Relationship Management Roundtable

Advisors have been racing to revamp their practices in light of upcoming new client relationship management rules. WP gathered a group of industry veterans to sound off on the new regulations known as CRM2.

Client Relationship Management Roundtable
Advisors have been racing to revamp their practices in light of upcoming new client relationship management rules. WP gathered a group of industry veterans to sound off on the new regulations known as CRM2.

The panel discussed the impact the new regulations will have on advisors, how firms will implement them and what these changes mean for advisors. As the industry gets set to move ahead, here is what the experts want you to know.

CRM2 Panel
The panelists. Click on the image to enlarge.

WP: How do you, the advisor, feel about CRM2 and the second phase implemented in June?

Arthur Charles Salzer: As a wealth management firm we welcome the enhanced transparency that CRM2 provides. Investors should know the full cost of their investment products and services. Many Canadians are invested in these products by their advisors, but don’t clearly understand their full cost. CRM2, once fully implemented, will help investors better understand the trailing commissions and deferred sales charges associated with holding these products. This should lead to some frank discussions between clients and their advisors.

Matthew J. Ardrey: Our platform is mostly through pooled fund solutions, ETFs, or by direct hire of money managers. We already disclose benchmark information through our investment policy statement. We fully disclose all costs to the client and report quarterly on performance against benchmarks. So if you ask how I feel about CRM2, I can say I feel happy that the industry will finally be required to provide the information necessary for our clients to make informed investment decisions. I welcome the transparency that this is bringing to our industry.

WP: What is your firm’s position on CRM2? 

William Britton: The impact of the changes being implemented in June should be minimal. The required disclosures are, for the most part, already included in applications, forms, and point of sale documents, and there is already an expectation for advisors to be reviewing such details with their clients. Changes in 2015 and 2016 will be more significant and warrant a focus on fee discussions at present. There is no need to be unduly concerned. They plan on communicating regularly and providing the tools and information necessary to thrive in the new environment. For some investment representatives, this will be a great opportunity to articulate their value and win business.

Lisa Thompson: I know that RBC Wealth Management is in full support of these rules, given that they will result in a more positive experience for the client. They are intended to improve disclosure and transparency for clients with respect to products, fees and rate of return reporting. Clients will have a better understanding of the value they are receiving for their fees.

WP: How has your firm adapted to the regulatory changes?

Salzer: We are still adapting as we prepare for the changes scheduled to occur in 2015 and 2016. So far, the only impact on our firm has been providing enhanced regulatory disclosure information to clients. The big changes are happening behind the scenes as we work with our portfolio management systems service provider to ensure that we have the technology in place to meet our enhanced client reporting obligations. Our business practices haven’t changed as a result of CRM2 yet. We still deal with clients as we always have. Our client on-boarding and disclosure documents have become more robust, but only slightly. The only significant changes we foresee to our business practices is the way we will be presenting investment performance and client statement information to clients. However, these are more changes in back-office operations than in business practices. We will still evaluate potential investments for our clients’ portfolios, assess our clients’ risk tolerance and come to an understanding of our clients’ investment objectives the same way. These are our practices—this is where we add value to our clients. These practices won’t change. What will change because of CRM2 is how we account for what we have done for our clients, how we explain it to them in their client statements, how we performed in providing our services and what these services cost.

Ardrey: We are implementing minor changes that need to be made to our reporting. For example, we provide returns on a time-weighted basis as a way of comparing to the relative index. We will now need to provide returns on a money-weighted basis as well.

WP: What has been the reaction from clients? 

Salzer: We haven’t informed clients of the upcoming significant changes as they are still more than a year away from implementation. Generally, clients have become accustomed to increased regulatory requirements over the past decade and understand that we operate in a highly regulated environment.

Thompson: I believe the greatest benefit with CRM2 is that it will facilitate a high  level of transparency for Canadian investors, helping them better understand products, fees and rate of return reporting. Common standards across the competitive landscape will create a more even playing field for advisors and firms.

This feature is from Wealth Professional Canada's Issue #2.3. To read more, please download the issue.


WP: What are the major challenges for your firm keeping in line with CRM2?

Ardrey: The greatest challenge will be in administration and reporting. Change is never easy. Entire reporting structures will have to be shifted. This is a massive change in the industry and a cost that many advisors and firms will have to bear. With changes in the reports advisors will need to explain to their clients how to read and understand the new information. This can lead to confusion on behalf of the client, especially in the area of explaining money-weighted returns.

William Britton: Implementation in long-running practices may be a challenge. Although CRM2 represents new requirements, the need to disclose this information in the best interest of the client is nothing new at all. It may be very difficult to start discussing fees and benchmarks in the later stages of a relationship if these topics have not been broached before. Furthermore, introducing them in such a new and blatant format—even if they have been reviewed in a different manner in the past—may result in confusion or an unintended emotional response in the consumer that could have a negative impact on an otherwise healthy and productive client/advisor relationship. It is also worth considering that, given the fragmentation of regulatory requirements from one channel to another, and from one product to another, consumers may be unintentionally attracted to what they see as simpler solutions—not because they are better suited to the needs, but rather because they appear more straightforward simply because they do not have the same requirement.

WP: What do you feel will be the greatest benefit to the industry, the advisor and the consumer with CRM2?

Salzer: For the industry it will be empowered consumers who will demand lower-cost investment products and services. Increased cost transparency may see clients shift passive investments in mutual funds toward more tailored portfolio management solutions for part of the market, benefiting advisors, while driving fund managers to lower their costs, benefiting consumers.

Ardrey: The greatest benefit is transparency. The average investor does not understand the costs they are paying and what benefit they are receiving for these payments. For our industry, this will help clean up a lot of the negative press surrounding fees. This will increase the professionalism of the industry. Many advisors may see this as a challenge, but I for one believe that the consumer is OK paying for something they feel they are receiving value for in return. Too many times the financial planning component of the job is devalued, as it is given away for free. This will help those advisors who are really giving their clients value for the fees they pay, as it will differentiate them from those who may not be.

Britton: Always put yourself in the shoes of the client. What sorts of things do you want to know when you are the customer—and how much more confident are you in your decisions and relationships when you trust that you have been given all of the relevant information? Your clients are no different, and deserve no less. The majority will appreciate it and reward your open and honest communication. I would also hazard a guess that those who do not appreciate the value you provide in exchange for the fees that you earn are not likely your ideal clients anyway.

Thompson: The considerable investment required by firms as a result of these changes, combined with increasing administrative demands on an advisor’s time, are challenging. Coupled with demands from increasingly sophisticated clients, this means that the wealth management industry as a whole has never been under greater pressure to adapt to client needs and prove its value … while investing to ensure full compliance with regulatory requirements.

WP: What do you feel are the greatest challenges to the industry, the advisor and the consumer with CRM2?

Britton: Approached properly, the client relationship should improve. Greater transparency and rapport should be a benefit to all stakeholders. However, any compliance regime will prove ineffective if those involved go through the motions simply because they’re told they have to, or worse still, if they choose not to follow the new rules. Should an advisor choose to ignore regulations, no amount of regulatory reform will impact their practices.

Salzer: The greatest challenge for the industry will be dealing with the operational system challenges of preparing for the different reporting requirements. Building and testing new reporting processes will be challenging for firms of all sizes. The greatest challenge for the advisor will be explaining the change in performance reporting to the client. Correspondingly, the greatest challenge for the client will be in understanding the new information on their client statements and understanding the new performance measurement into something that is meaningful to them.

WP: What is the number one piece of advice you would offer to an advisor struggling to transition?

Ardrey: Try to keep your focus on the end result for yourself and your client. CRM2 is an improvement in the client experience. Having provided my clients the kind of information CRM2 for years now, I can tell you that they appreciate the upfront clarity and transparency of the information. This opens up further conversations and questions. It also helps me understand my clients concerns better and in turn I can respond to those concerns.

Salzer: Engage your portfolio management system service provider early on how to prepare your historical data for the new MWRR performance calculation and make sure to test accuracy of security position market values at account opening. Thompson: As with anything new, clients will undoubtedly have many questions, including inquiries about the fees they are paying and what that covers. Advisors need to ensure they are fully educated about the new requirements and are equipped to answer all client inquiries. This is a great opportunity to underscore the value of the comprehensive wealth management experience that my clients receive.

WP: Do you feel CRM2 will prove to be as fruitful as it’s intended to be?

Thompson: While it’s still early days, we’re confident that clients will benefit from the new rules and that the integrity and trust in the industry will be strengthened. I truly believe the client-advisor relationship will only strengthen because of this. Salzer: Eventually, once clients begin to see long-term historical performance and cost data in their client statements and annual disclosures. But this will take several years.

Ardrey: I certainly hope it will be. CRM2 provides a lot of new information for investors. Much of its success will be based on advisors clearly communicating this information to their clients. For too long the average investor has not been provided the information to evaluate his or her portfolio. Armed with this new information, they will finally be able to make more informed choices about their investments.

WP: What’s the missing link, in your opinion? Where does CRM2 lag behind?

Britton: First, if the ultimate intent is to provide the client with an exact notion of the amount their advisor is being compensated, it doesn’t seem to make a lot of sense to bundle the firm fees with those received by the dealer. At best, it demands further clarification on how those commissions trickle down to the individual advisor—which appears to be the only breakdown that is not required. In the end, it still leaves questions unanswered, and there is not true transparency. Second, as CRM2 applies to many investment products, but not all, the ability to compare apples to apples remains unavailable. Unfortunately, this is a function of the regulatory framework of the financial services industry as a whole and cannot be resolved at this level. That said, it does highlight the inconsistencies that the industry, the advisor and the consumer have to face. So long as we continue to regulate products instead of advice, questions and concerns will likely remain.

Thompson: As mentioned earlier, the industry brought all stakeholders together on this initiative and there has been ample opportunity to share views, provide comments to regulators and participate in roundtable discussions leading up to implementation. We need to allow some time before determining if any changes are required, but we believe we’re starting from a good spot.

Salzer: The major problem with CRM2 is that there is no consumer awareness program being conducted by the securities administrators to inform investors of the coming changes. There is no effective investor outreach program from the regulators to help consumers understand the changes that will occur and explain why advisors are moving to a MWRR.

Ardrey: I would like to see this implemented immediately rather than over a number of years. The longer they wait to implement, the longer it is going to take to see the benefits of these new regulations.

This feature is from Wealth Professional Canada's Issue #2.3. To read more, please download the issue.