Last year, regulators announced the Client Relationship Model - Version 2 (CRM2), which included a key requirement that financial advisors explicitly disclose all investment fees charged to clients. The regulation, which went into force in July 2016, is required to be implemented by all financial advisors by January 2017.
In an industry where investment costs have traditionally been buried in fund documents and management fees, this is a significant change to investment services. It’s also good news for Canadian investors, who will now have a clearer picture of their investing costs. For some, this may be an opportunity to evaluate the costs they’re paying and lower their fees.
What is CRM2?
CRM2 is a regulation that will bring more transparency to:
- the fees and commissions paid by Canadian investors to their advisory firm
- performance in their investment portfolios
Starting this month, all advisors will have to send statements to their clients showing all fees (in dollars) that are taken out of their portfolios, along with the rates of return within investment portfolios for various time periods.
Why should I care about CRM2?
For a lot of Canadian investors, seeing these statements may give them sticker shock, especially for those invested in mutual funds. Canada has the highest cost of investing in mutual funds in the developed world, with an average Canadian equity mutual fund costing 2.35%, according to a recent Morningstar report. Considering how these costs compound over time, the price is significant.
Many investors might not be aware that these costs can decrease the value of their portfolio by over 40%. That’s money that can never be earned back.
With CRM2, you can now evaluate the value of services you get from your advisory firm, and compare it to the costs you’re incurring. Is the cost you’re paying worth it?
Are there any pitfalls of CRM2 that I should keep in mind?
CRM2 only forces the disclosure of all advisory fees and commissions in dollar terms. It doesn’t include the management expenses charged within a mutual fund or an exchange traded fund.
Think of it this way: it’s like getting a new set of tires for your car and incurring a total cost of $1,000, but only getting a statement for some parts and labour charges of $500.
You should pay attention to the total costs of investing, including the management expenses charged inside mutual funds or exchange traded funds; not just what you see on your annual performance and cost statements.
How can I lower my investing costs?
- Look for fee-based advisors so you know exactly how much you’ll be paying for the services you need. Fees buried inside investment products usually cost more than they should.
- Use exchange traded funds in your portfolio; they’re low-cost and can help you diversify your portfolio.
- Look at online advisors, like Invisor, to lower costs and get advice from qualified investment professionals, which traditionally was only available to wealthy Canadians.
There are a lot of options out there that can help you save more and spend less on your investments. Take a look at your statements, do some research, and ask questions. You deserve to know exactly how much money is coming out of your portfolio.
If you want to know more about the total cost of your investments, or are looking to lower your fees, feel free to reach out to one of our investment advisors.