The Client Relationship Model (CRM) reforms are all about enhancing investor protection by addressing the advantage that the industry has over the average retail client in terms of both investment knowledge and market power. The first wave of the new rules tightens suitability requirements, cracks down on conflicts of interest, and improves relationship disclosure. The second wave, known as CRM 2, focuses on greater transparency about the costs of investing, and the performance of client portfolios.
Taken together, these sweeping changes should result in clients that are better informed about how much they are paying, and what they’re getting for their money. At the same time, the industry (both dealers and advisors) should be doing a better job for those clients, through more rigorous suitability assessments and greater attention to managing potential conflicts. Ultimately, investors should be better off as a result.
However, from a strategic point of view, the CRM reforms may actually run against investor interests.
And there may be more to come. In the past couple of years, securities regulators have begun to explore the idea that even more fundamental reforms may be required to truly improve investor protection. In late 2012, the Canadian Securities Administrators (CSA) published consultation papers that examine the possibility of imposing a fiduciary duty on financial advisors (requiring that advisors put investors interests before their own); and consider more dramatic changes for the fund industry in particular, such as possibly banning embedded compensation.
Many investor advocates insist that these concepts are key if regulators truly want to ensure adequate investor protection. The Ontario Securities Commission’s Investor Advisory Panel (IAP) believes that what retail investors really need is for the investment industry to be held to a fiduciary, or “best interests” standard, says the panel’s chair, Connie Craddock. “The current situation — and that would include the current CRM version of suitability — is still a suitability, not a best interest, regime,” she notes.
Craddock says that the current situation allows conflicts to persist that could not survive if a fiduciary duty was required. “Bottom line, CRM permits advisor payments from product manufacturers,” she says, noting that these are “unacceptable conflicts of interest that a best interest duty would never allow.”
In short, CRM does not go far enough for investor advocates. Moreover, its prolonged implementation may deter regulators from considering more fundamental reforms.
For one, CRM is a complex, costly undertaking that has been years in the making, and won’t be fully implemented for a couple of years yet (the middle of 2016). Regulators already suffer constant criticism for the volume of reforms and the compliance burden that their rules impose, so they will naturally be reluctant to introduce further changes still.
This may be particularly true when it comes to further initiatives — such as adopting a fiduciary duty or banning trailer commissions — that aim to address many of the same problems that CRM is designed to tackle. Indeed, in consultation sessions held on both projects last year, various members of the investing industry argued that CRM has to be given a chance to work before it can be determined whether other sorts of reforms are required.
But, it would likely have to be well into the next decade before the reforms are fully implemented, and their effects can be assessed.
That sort of delay is unacceptable to investor advocates. As the IAP notes in a letter to regulators earlier this year: “We have debated, discussed and studied the issues and their solutions for many years. It is time for decisions that will lead to a more robust investor protection regime in Canada.”
This sense of urgency is driven by both demographic realities, and a frustration with the evolutionary approach to reform that CRM represents. “With baby boomers now in their retirement years and receiving inheritances from their parents, it is more critical than ever that their investments be protected throughout their senior years,” the IAP stresses, adding that “the inadequate and outdated suitability regime and current conflicted compensation structures” need to be replaced with higher standards of investor protection “within a reasonable timeframe”.
That’s just not possible if CRM is going to get its chance to work first. For now, the CSA has only promised further study of more fundamental reforms.
Next: Implementation issues.