Tech support: Keeping up

The investment industry is in the home stretch of implementing the client relationship model, phase 2 (CRM2), with firms preparing to send out the cost and performance reports that will tell clients precisely how much they have spent to invest and how much they have earned.

Although the potential impact on clients has received much attention, CRM2 also is a huge technical challenge for investment dealers, which must collect the data, crunch the numbers and distribute them to clients in new client account statements. How are these firms faring and what technology tasks are they grappling with?

The new annual cost and performance reports are due by July 2017. Many firms have chosen to use the calendar year as their reporting period; in those cases, the first of the revised reports will be distributed in January 2017.

Although many firms are on track to meet these deadlines, others, especially smaller firms, have some catching up to do. “Some are already starting to produce extracts [of client data] so that they can start testing, others are finalizing some requirements and everything in between,” says David Mastroberardino, product director at wealth-management software firm Croesus Finansoft Inc. in Montreal.

Some smaller companies lack the resources to comply with large regulatory changes by deadline, says Anthony Boright, co-founder of Connecticut-based investment communications technology firm InvestorCOM Inc. “In some cases, they’ve said, ‘We can’t do it all; we can’t boil the ocean. So, we’re going with our highest priorities and we may risk audit’.”

Other firms appear to be adopting the ostrich posture, and have not yet confronted their new obligations: some firms in this group still are unaware of CRM2’s full implications for them, Boright warns: “They’re all drinking from a firehose of late, and they don’t realize what’s going on.”

In some cases, lack of education is to blame, points out Donna Bristow, vice president of client management and strategic product development for investor communication solutions at investment software provider Broadridge Financial Solutions (Canada) Inc. in Toronto. The firm has been educating its customers about CRM2 for several years, but, she notes, other firms still are looking for help. “With some of the smaller firms, we still get approached today to see if there’s time to provide assistance in meeting their regulatory dates.”

Gregory Smith, partner in Ernst & Young LLP’s financial services advisory practice, notes that CRM2 is causing other initiatives to fall behind, creating a resources crunch: “What we hear is that the expenses of meeting the obligations of CRM2 are crowding out some of the more strategic and discretionary projects that [firms] would rather be doing.”

Bob Dorrell, senior vice president of sales and distribution at Assante Wealth Management (Canada) Ltd., says that CRM2 has been a significant undertaking for his firm, even though it has an information-technology team. “We estimate a minimum of 2,000 person-days of effort,” he says, noting that this covers the entire CRM2 project, not just the technology component. “We are not sure how smaller firms can make this kind of investment.”

One of the most difficult undertakings has been creating the report that summarizes the performance of a client’s portfolio. Companies needed to reach consensus on the mathematical process to calculate money-weighted returns, which wasn’t specified in the CRM2 rules. Member consultation led the Investment Funds Institute of Canada (IFIC) to settle on an internal rate of return (IRR) formula, which members have had access to for several months, says Michael Stanley, president and CEO of London, Ont.-based Quadrus Investment Services Ltd. and chairman of IFIC’s CRM communications task force.

Bristow notes that some companies still are grappling with IRR. “Some firms are very familiar with that calculation, while others, depending on their mandate and investment philosophy, aren’t very familiar,” she says.

Part of solving this problem requires data integration. Ideally, all of the data would come from one system, but most broker-dealers have multiple data feeds that often use different formats. “The data standards have evolved over the years, and much of what we report relies on historical data,” says Dorrell. Mapping data from old to new systems can take time, he adds.

Another issue is that the performance calculations required for client account statements are computationally intensive, and that may put a squeeze on computing resources. However, new technology is helping. “A lot of firms are using cloud technology to leverage the scale that they need to do these performance calculations,” Stanley says. “That wouldn’t have been done five years ago.”

Before the end of the year, there will be some testing to do for many firms, adds Stanley. “As [firms] look to the fall, the best practice would be conducting a parallel run in the third quarter, just to go through the process and check timelines. That’s where most firms would be at,” he says.

For stragglers late to the game, the pressure is on.