THE FINAL STAGES OF PHASE 2 of the client relationship model (a.k.a. CRM2) will kick in officially next July. For practical purposes, the new annual reports disclosing portfolio performance and dealer fees, charges and commissions are not likely to be provided to investors until 2017.
CRM2 looks likely to trigger something of a “perfect storm” for some financial advisors. But for more diligent and transparent advisors, CRM2 may well kick-start a period of prosperity.
Two distinct groups of advisors emerged during the past two bear markets. One segment was “missing in action” (MIA) and avoided client contact. At the other end of the spectrum sits a contingent of more professional advisors who do financial planning, document their advice and achieve good transparency.
During those tough markets, MIA advisors consistently lost clients; the more professional group welcomed long lists of new clients. Where the rest resided on that spectrum indicates the evolution of their businesses during and after each bear market.
Bear markets tend to make investors more fee-sensitive. When clients see leaner or negative returns, they often start looking for “what went wrong” – and fees are atop the list of things to attack. Clients often emerged disappointed after such an investigation, prompting many to seek a new advisor.
Similarly, I expect that CRM2 will put lots of money in motion. The financial advice industry has failed to tell clients clearly how much they pay and how well their portfolios have performed.
Seeing fees paid to dealers will be an eye-opener for clients – particularly for larger accounts – because most have never seen costs expressed in dollars. Most clients will be taken aback.
In one form or another, I have provided my clients with clear, total cost disclosure on their investment portfolios in dollars and percentages for most of my career. Each time that I sat in front of a client and showed total cost on paper, it was the first time each client had seen this information expressed this way.
Although the numbers always took my clients by surprise, disclosure always strengthened trust because it was done at the outset of each client relationship.
But CRM2 will be different because long-standing clients will receive mandated reports when most of your competitors will be doing the same thing. Some clients’ eyes will glaze over. But some other clients will ask why this information wasn’t disclosed before. Some client relationships will suffer. More forward-thinking advisors who took steps years ago to provide this transparency for clients are likely to benefit vs those advisors who postpone disclosure for as long as possible.
Investment costs and the timing of investment flows will combine to show strikingly low dollar-weighted returns for clients who have been invested for five or more years. This information may well have an even stronger impact: the days are numbered for advisors who provide little value and don’t do even basic planning. Other advisors are sure to see some clients leave, resulting in some financial pain.
But good advisors are providing good value. Most clients want these advisors to be paid fairly so they can benefit from their advice for years to come.
Dan Hallett, CFA, CFP, is vice president and principal with Oakville, Ont.-based HighView Financial Group, which designs portfolio solutions for affluent families and institutions.
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