When Disclosure Fails to Disclose: CRM2

There’s a new set of reporting rules coming to Canadian investment accounts soon, known as CRM2. If you haven’t heard of it you should sit up and take notice, because for a large portion of Canadians it will be nothing more than confusing and deceptive.

The Client Relationship Model – Phase 2 (CRM2) is a new set of industry regulations meant to provide Canadian investors with more details on their investment costs and performance. It was developed by the Canadian Securities Administrators, an organization representing Canada’s investment industry regulators.

CRM2 regulations have been phased in over the previous three years, with the final steps implemented on July 15th, 2016.

Specifically, starting July 15th, 2016 the following changes will be implemented:

1) Investment firms are to provide an annual report that shows, in dollars, the charges and other compensation paid to the firm and your advisor for products and services provided.

2) Investment firms are to provide an annual investment performance report that covers:

  • Deposits into, and withdrawals from, your account
  • The change in value of the account; and
  • The investment return, as a percentage, for the previous 1, 3, 5, and 10 years

This all sounds beneficial, but if you own any mutual funds you’re only going to get a fraction of the total picture. The disclosed fees that are paid to the firm and your advisor will not include the management fees charged by the mutual fund managers. These are additional fees that affect your investments, but they will not be disclosed on the new annual reports. This to me is one of the, if not, the biggest con job ever pulled off by the investment industry on the Canadian investing public.

Right now, when you get your investment statement, there is no indication of how much you’re paying in management fees for any mutual funds (this is also true for segregated funds sold by insurance companies). Even if you know what the management expense ratio (MER) of a mutual fund is, you still can’t quantify it. Why?

Mutual fund management and distribution is extremely lucrative for those manufacturing and selling mutual funds. Unfortunately, they are usually not as lucrative for those that invest in them.

Those in the financial services industry who sell mutual funds and segregated funds will not agree with me, but it’s been proven repeatedly that higher costs to investors translates to lower returns. It’s simple math.

I own a business and I understand that in order to provide a product or service, there are costs. I have no problem with that. I do, however, have a problem with taking money from people when they have no idea how much it is.

Where else in your life would you agree to have someone provide you with a service and allow them to take money out of your account without telling you how much they take – every month? Most people wouldn’t sign up for such a service, yet when you buy a mutual fund or segregated fund that is essentially what you’re doing. You agree to have a company manage your money, and thereby you are agreeing to have them remove money from your account without disclosing the true dollar value.

In a very sneaky way, the investment industry is only going to tell you what fees the mutual fund companies are passing along to your advisor and firm, and not the total fees and expenses that affect your account.

Specific wording from CRM2 states: “For investment funds, a Management Expense Ratio (MER) is paid to the fund managers which is not included on this report. Details on MER charges are available in your prospectus or fund facts document.”

The CRM2 annual reports will not disclose, in dollars, the management fees charged by fund managers. Instead you must search for and calculate the MER charges yourself.

Before CRM2, no one in Canada could tell you how much they paid in mutual fund fees. Apparently, after CRM2, this will continue to be the case.

If mutual fund companies can run programs that can calculate how much in fees to extract from an investor every day, there is no reason why that information shouldn’t be available to the investor.

I think it’s unfortunate that the Canadian Securities Administrators are allowing the investment industry to get away without full and complete disclosure, and thus making CRM2 basically useless.

We’ve all heard about how dangerous it is to allow the fox to guard the henhouse, but in Canada it seems not only do we allow the fox to guard the henhouse, but they don’t have to disclose how much we are paying them to do so.