For much of canada’s financial services sector, the introduction of the client relationship model (CRM) is like a tidal wave or an avalanche, in that they may see it coming well in advance of impact, but it still may transform the landscape permanently.
Slightly more than a year ago, the Canadian Securities Administrators (CSA) finalized the second phase of reforms, known as CRM 2, designed to reshape regulation in the retail investment business. These changes have been in the works for years in various forms, and the regulators have granted firms several years to implement them. However, much of the sector still is expecting CRM 2 to have a dramatic impact on their businesses.
In this year’s Regulators’ Report Card, Investment Executive asked the 107 compliance officers (COs) and company executives surveyed to gauge the expected impact of the CRM 2 reforms on their businesses over the next five years on a scale of one to five – with a score of one being “not at all” and five indicating that these reforms will be completely transformative.
The majority (65.5%) of those who gave a rating in this supplementary question expect the impact will be either a four or a five on that scale. Almost a quarter of those surveyed (22.7%) gave a rating of three out of five, saying they expect the reforms to have “somewhat” of an impact; 10.2% see modest changes (a rating of two out of five); and 2.3% of respondents gave a rating of one out of five, meaning they don’t see their industry changing at all as a result of CRM 2.
Indeed, it appears that financial services firms’ COs and executives overwhelmingly anticipate major changes for the sector as a result of the CRM 2 reforms.
Although there’s wide range of opinions on just what those changes will be – and how welcome they are – if there is a common thread to the sector’s views, it’s that the investment cost-and-performance reporting requirements that will be introduced as part of CRM 2 over the next couple of years are sure to be significant.
The most notable of these changes – new annual reports that aim to show clients more clearly how their portfolios have performed, and what clients paid their dealers during the year – don’t take effect until mid-2016. But, already, the sector is anticipating a dramatic impact.
“It’s going to radically change our industry,” says a chief compliance officer (CCO) with an Ontario-based full-service dealer, noting that CRM 2 will force firms “to share information that they naturally don’t want to share and which they have not had to share traditionally.”
The expectation is that when dealers have to spell out exactly how much their clients have paid to the dealer during the year – in dollar terms – it will spark some serious conversations between clients and their financial advisors, as those clients re-examine how much they’re paying and what they’re actually getting in return.
“Right now, it’s difficult for clients to see if they are getting value from their advisors,” notes an executive with a small investment dealer in Ontario.
But once clients get a clearer look at the cost side of the equation, they will be in a better position to judge the value of the advice and service they’re getting from their advisors and dealers.
“People will be shocked to find out all of the indirect fees they pay. The public generally knows more about buying a car than they do about investing,” says a CCO with an investment dealer in Ontario. “Referral fees will be a big shocker. Eventually, people will connect the dots.”
Once clients start waking up to the costs of their investing activity, the Report Card’s survey participants expect the financial services sector will be transformed fundamentally in several ways. For one, survey participants anticipate that there will be a greater delineation between good and bad advisors.
“It will be problematic for advisors who don’t provide good value, especially in bad markets,” notes an executive with an investment dealer in Ontario. “Advisors who do provide good value will prosper.”
Next: Who will benefit
Who will benefit
Some survey participants expect that the primary beneficiaries of this new dynamic will be the big, bank-owned dealers, which have the brand and name recognition to comfort clients, at the expense of the smaller firms.
Conversely, there are executives at small dealers who believe they will prosper in this new environment because they will be better positioned to provide the sort of high-touch service that clients will demand once they realize how much they’re paying.
“It’s really bad for the banks and a heyday for me,” notes an executive with a small mutual fund dealer in Ontario.
It’s also expected that some clients will conclude that they just don’t get adequate value from their full-service dealer whatsoever, and will turn to discount brokers instead. And, at the same time, firms may start segmenting their clients even more aggressively than they do already – with the result that smaller, less valuable clients may have a tougher time finding investment advice.
This may happen for a couple of reasons, the survey participants suggest. For one, the population of advisors may decline as advisors who can’t justify their costs to clients are driven out of the business.
“We will see an exodus of advisors,” says a CCO with a full-service dealer in Ontario. As a result, “clients with small portfolios will find it harder to find advice.”
At the same time, the more valuable, high net-worth clients may start to put downward pressure on costs once they realize how much they’re paying. In turn, that may leave even less room for advisors to handle small clients as advisors’ overall revenue drops.
“Larger clients subsidize smaller clients, and now the smaller client is going to have a harder time getting advice,” suggests an executive with an investment dealer in Ontario.
If the CRM 2 changes do drive some advisors out of the business, it’s sure to be wrenching. However, several survey participants indicate that they believe this will be a good thing for the sector.
“Some advisors will leave the business, but maybe that’s for the best,” suggests an executive with a mutual fund dealer in Ontario. “A lot of them are just salespeople.”
“I think it’s a good thing,” adds a CCO with an Ontario-based mutual fund dealer. “The [investment] industry originated in the 1970s as a sales business, and it has evolved toward an advisory business. CRM 2 will continue this trend.”
There also are expectations that the CRM 2 reforms will encourage the shift away from transaction-driven business and toward the fee-based model.
“[Such a shift] could be in the best interests of advisors in that it might give them a steadier income,” suggests a CCO with a full-service dealer in British Columbia.
Of course, not everyone is expecting CRM 2 to transform the sector. In some cases, survey participants were skeptical about whether these new cost-and-performance reporting requirements will even penetrate clients’ consciousness. Some survey participants believe that CRM 2 is just a futile exercise in ramping up firms’ disclosure obligations – and that clients won’t read more disclosure, no matter what.
Other survey participants say they are already doing much of what CRM 2 requires, so the new obligations won’t be a big deal.
“It’s much ado about nothing,” says a CCO with an Ontario-based mutual fund dealer who’s expecting a modest impact. “[The regulators] have given us plenty of time to adjust. I’m really not sure why other dealers are making such a big fuss about it.”
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