For something with as dry a name as the client relationship model, phase 2 (CRM2), this new set of disclosure and reporting requirements introduced by the Canadian Securities Administrators (CSA) this year has certainly generated a lot of attention. In media and within the investment industry, the tone of the conversation has ranged from alarmist to nonchalant, which suggests that there is still a good deal of confusion about what CRM2’s impact will really be. There is plenty of room for education on the issue, both for financial advisors and for the investors they serve. CRM2 focuses on several reporting requirements between investment firms and their clients. The one gathering the most attention focuses on greater clarity for clients to see what they are paying via embedded product fees.
I believe the time is ripe for CRM2. It is good for investors, for advisors and for our industry. The 2008 financial crisis sorely damaged the investment industry’s reputation. But, today – more than six years on, and with a continuing rally in equities markets – Canadian investors have begun to see their advisors and their investment outlooks in a more positive light. Last year, BlackRock Inc.’s Investor Pulse survey found that Canadians had very high levels of confidence in their advisors, and were more optimistic about their financial futures than the global norm. CRM2 can only build on that confidence.
For the vast majority of investors who already get valuable advice from their advisors, and for the vast majority of advisors who give that good advice, the impact of CRM2 will be marginal, at most. The real challenge of CRM2 will be for that minority of investors who aren’t getting good advice (or much of it at all), and for advisors who haven’t done a convincing enough job of demonstrating their value. In those cases, as in others, the increased transparency required by CRM2 might actually encourage better client/advisor relationships. In fact, by making it clearer just what a client is paying for, the new disclosure rules should encourage productive conversations about fees and just how clients pay their advisors.
That doesn’t need to be a scary conversation, either. Financial advice has real value, and making it clear what your clients are paying only makes sense – not just because it adheres to the principles of disclosure and transparency, but also because it allows your clients to perceive that they are paying for something valuable. Our industry in general needs to do a better job of showing the value of advice, and the good thing about CRM2 is that it puts a visible, understandable price tag on it.
In general, we think the CSA’s approach is the right one. Eventually, CRM2 will help to ensure that investors have the information they need to make truly informed choices. My quibble is that one little word: eventually. The full effect of the new requirements won’t be realized until after the third phase of CRM2’s implementation, which doesn’t start until July 2016. That is more than long enough, as these kinds of reforms have been under discussion in Canada for more than a decade. If more transparency is warranted – and if, as we believe, the new reporting requirements are hardly onerous – why wait? The answer, of course, is that advisors and fund providers don’t have to wait – and some aren’t. Already, many firms are ramping up their reporting facilities to comply with CRM2 long before July 2016.
Beyond CRM2, the next area of concern for investors and advisors is the potential for more regulation of fees and products. At BlackRock, we strongly believe that market forces of supply and demand, not regulatory intervention, should be the primary drivers of investment options. In a December 2012 discussion paper, the CSA asked for comments on changes to mutual fund fees – including, in effect, placing regulatory requirements on the type and pricing of products offered by fund manufacturers. That approach will simply lead to market distortions and add to costs.
I look at the issue of fee regulation in much the same way. There has been a lot of focus on trailing commissions recently, with some people calling for their elimination. But banning trailing commissions could create unintended negative consequences for investors, who may balk at suddenly having to pay significant advisory fees up front and thus may make unsuitable investments in products for which they are not receiving any advice. Better to keep the full spectrum of compensation models currently available, whether that’s ongoing commissions or fee-for-service, and be clear about them. That will allow investors to decide which model best suits their needs while preserving investor choice.
The most effective regulatory approach is to encourage informed investor choice, not to implement bans and prohibitions. And that’s the real value of CRM2. It will give Canadian investors the disclosure they need to make better decisions. If regulators let the forces of supply and demand look after the rest, that should mean a more efficient and rational investment marketplace – and, in the end, happier investors. That’s something we should all look forward to.
Noel Archard is managing director and head of BlackRock Asset Management Canada Ltd. in Toronto.
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