Total cost reporting — are we overreacting or underreacting?

For securities dealer firms, the most material changes are the inclusion of two new numbers in the CRM2-mandated cost/fee report that firms produce and send to clients. The goal of including these numbers was to improve transparency and investor awareness, specifically around indirect and embedded fees they pay on their mutual fund and ETF holdings — not all of which were caught through CRM2.

The new numbers to be included in the annual fee report are:

1. Total dollar cost of investing: the aggregate annual cost to the client, in dollars, of owning all investment funds in the client’s account. This number includes the client’s share of all fund expenses (including management fees, performance fees and fund trading costs) and direct investment fund charges, as well as all dealer and advice costs.
2. Fund expense ratio (FER): for each fund in the account at any time over the past year, expressed as a percentage. The FER is a total of the management expense ratio and trading expense ratio (TER).

There will be new disclaimers, of course. Some of these will explain that certain numbers included in the reports are approximations, or that comparisons of numbers may be difficult. Others may describe the fact that the two new numbers will never be easy to relate to each other. Fair warnings, but not particularly helpful.

While technically the requirements are already in effect, the first fee reports to include these new numbers will be for 2026, so clients will start to see them in early 2027.

For segregated funds, the changes will be even more significant. Seg funds did not implement fee or performance reports, which were mandated for the securities industry about a decade ago. As a result, this will be the first time that seg fund holders see this type of fee and performance information. Additionally, since seg funds generally have higher costs than mutual funds, there will be particular sensitivity to the disclosure of this information.

More alphabet soup

You will already have noticed that the initiative has delivered yet more acronyms: TCR, CRM3, FER and TER. That doesn’t even include some of the other terms that firms will have to face at least internally to collect and manage the data required to determine the new numbers, such as daily cost factor or DCF.

While there’s probably no way around industry participants learning the new terminology, I am calling this out here to issue an early warning: we should be careful to avoid using this terminology with clients. This includes in the statements, but also in our conversations with most clients.

TCR is principles-based, and the industry has considerable flexibility on how this is implemented. Given the already complex environment in which we operate and the existing alphabet soup of acronyms, we should strongly resist the urge to start trying to teach all these new terms to clients.

Instead, we should think about what clients want to know about fees and explain it in terms that are familiar to them. In other words, meet them where they are. We should develop a narrative that simplifies the complexity, and packages the new disclosures in a way that is meaningful to clients and provides transparency instead of further confusion or disengagement.

Ready or not?

Four observations about firm readiness for TCR:

1. Much of the focus so far has been on data readiness. This is not a surprise — it was a big feat to source and design the collection of the necessary data, and industry should be justifiably proud that they are data-ready.
2. Too many firms are preparing just to modify a version of their existing CRM2 reports. This is unfortunate, as many CRM2 reports were overly complex and difficult for clients to navigate and understand, even before the addition of the new data required by TCR. Those reports are getting long in the tooth — if they haven’t been changed, they’re about a decade old.
3. Other firms are simply adopting the sample fee report included in the TCR rules. This is not a requirement. While it may make it easy to implement the changes, the approach in the sample report is quite tactical and laden with acronyms. It will make it difficult for clients to understand. Ironically, this will cause more work for advisors as they start to educate clients to an unnecessary level of detail. It will not achieve the regulatory objective of transparency, and may lead to more calls and questions from clients resulting in higher cost for firms.
4. TCR provides an opportunity for firms to meet the regulatory objective by finding a way to break down the complexity and help clients understand what they pay and the value they receive in return. Clients would be grateful.

Suggestions for firms

You may remember that there was a lot of fear about CRM2, but its implementation did not lead to many clients leaving or changing dealers or advisors — at least, that we know of. However, it’s generally acknowledged that CRM2 made fee and performance information more available to clients and made them better informed.

It’s fair to say we shouldn’t overreact to the TCR requirements, but what should we do? We cannot and should not assume that no clients will see or be interested in the additional fee disclosure, especially given the amount of real estate it may occupy on client reports. For better or worse, annual reports are still the most-read client document.

Six suggestions:

1. Don’t layer on complexity. Try to avoid simply adding information to an already complicated CRM2 fee report. We know that clients did not fully understand or engage with all the information provided as a result of CRM2. While that may have been a relief for some firms at the time, improved client understanding of fees and performance leads to more trusting client relationships.
2. Bring a client lens to your response. Look at the required disclosure from the client’s perspective. Consider the average level of financial literacy and what clients are generally interested in understanding. And then, simplify, simplify, simplify.
3. Pay attention to seg fund disclosure. Since seg funds will be providing fee disclosure for the first time, and since they tend to be more expensive than comparable mutual funds, be sure to include key plain language information to help clients understand the value they provide.
4. Provide advisor training thoughtfully. Prepare advisors to understand what they need to know, but encourage them to educate and engage with clients without resorting to the alphabet soup of acronyms or descending into too much detail — unless a client asks, of course.
5. Assess the impact on different clients. It’s reasonable to expect the new disclosure to impact each client differently. For example, it would be helpful to understand which clients will see particularly large fees, because of either the size or type of holdings in their accounts. Encourage advisors to be especially proactive with those clients.
6. Turn this regulation into opportunity. The best way to do this is to focus on the value your firm and advisors provide for the fees that clients pay, instead of simply focusing on those fees.