Managing Your Money

In the past few months, you may have seen mention of CRM2 either on your investment statements, or in the newspaper.  It may not be the most exciting topic, but if you have investments, it will likely affect you.  The investment industry has been phasing in CRM2 in stages since 2014. What is CRM2? How does it affect you? CRM stands for Client Relationship Model, and it is basically an effort by the investment industry regulators to make things more clear and transparent for investors. It affects most investors who own mutual funds, stocks, etc.

The main aspects of CRM2 involve the reporting of investment performance, and fees. In the past, many financial institutions have reported to their clients how their investments have done, in the form of “return on investment”.  In principal, this is good, however there are different ways to calculate return, and therefore comparing different returns could be misleading. Dollar-weighted, time-weighed, annualized, internal rate of return, etc. are all fair ways to calculate the rate of return, but they could all give a different result. There was no consensus amongst financial institutions on which one to use.  So, the regulators have now established that all financial institutions will use the dollar-weighed formula to show clients the performance of their investments, and this will be reported on clients’ statements by July 15, 2016.

July 15, 2016 also marks the date when financial institutions will have to report most fees to clients, in dollar amounts.  Some institutions and advisors are welcoming this change, while others have tried to fight the regulators on it. The transparency of costs will help clients to clarify what they are paying for their investment management services. Up until now, many costs, such as mutual fund fees were somewhat “hidden”. They were reported in the fund prospectus and Fund Facts as a percentage, but not shown to clients in dollar amounts.  This made it harder for investors to clearly see what they were paying, and more importantly, what they were getting in return.

I’ve had more than one new client tell me they weren’t paying any fees at their previous institution, when the reality was that they simply did not see the fees they were paying.  In one case, a lady came to see me to get some financial planning advice.  She was dealing with a bank, and while they were giving some advice, it was more of an ad hoc approach.  We determined that what she really wanted to know, was where she stood for retirement, and would she run out of money in the future?  Once this was clear, she asked how much it would cost for me to do the financial planning and manage her investments, I replied that it would cost no more than what she was paying at the bank.  She was confused and told me that she wasn’t paying any fees at the bank.  I gave her quite a shock when I told her that even though she didn’t see the fees on her mutual funds, they were actually over $18,000 per year.

What’s also important to realize is that different things may be important to different people.  For example, access to exclusive investments may be important to some, while tax planning may be important to others.  Both may be willing to pay the same cost, but for different benefits.  I have a client who lives in a retirement complex on the West Island.  She pays $2,500 per month in rent, and has access to a huge list of services, activities, and amenities with her monthly rent.  I have another couple who live in retirement apartment closer to the city, and they pay roughly the same amount, but have very little included in their rent.  It all comes down to what’s important to you.

Above, I mention “most” fees will be disclosed. Costs, including switch fees, Account fees (e.g. annual fees, registered plan fees), transfer out/de-registration fees, sales taxes charged on fees, financial planning costs, sales charge compensation, trailer commission compensation, and the total paid for a fee based account must all be included, among others. One major cost that will not be shown is the amount paid to the investment manager.  So this means that the total fee you see, may still not be your total cost, and for this reason, I anticipate there will be more changes coming in this regard.

Expect to see this additional information on your next statement, if you haven’t already.  While some people may not realize what they’ve been paying in fees, the old adage applies well here “price is only an issue in the absence of value”. You may be over-paying or under-paying, depending on what you are getting.  When considering the question of fees, here are some things you should consider:  what kind of investment management are you getting? Are you getting financial planning? Tax planning? Estate planning? Do you have access to exclusive investment options or are you dealing with a firm which is mostly limited to their own investment products?

We recommend that clients have some kind of service pledge provided by their advisor.  That way you will know what you are getting and what to expect.  One way or another, there is a cost to investing.  If you’re not sure what services you are getting or what you are paying, this is a good opportunity to have a discussion with your advisor.

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Lynn MacNeil, F.PL. Vice President, Investment Advisor, is a Financial Planner with Richardson GMP Limited in Montreal, with 20 years of experience working with retirees and pre-retirees. For a private financial consultation, or more information on this topic or on any other investment or financial matter, please contact Lynn MacNeil at 514.981.5795 or [email protected].

The opinions expressed in this article are the opinions of Lynn MacNeil and readers should not assume they reflect the opinions or recommendations of Richardson GMP Ltd. or its affiliates. The comments contained herein are general in nature and are not intended to be, nor should be construed to be, legal or tax advice to any particular individual. Accordingly, individuals should consult their own legal or tax advisors for advice with respect to the tax consequences to them, having regard to their own particular circumstances. Richardson GMP Limited, Member Canadian Investor Protection Fund.