CRM2: four characters that, even at this late date, strike fear into the hearts of compliance officers.
At the Strategy Institute’s annual registration reform summit in Toronto yesterday, Noah Billick, general counsel and CCO at 3Macs, gave a personal account of putting CRM2 into practice.
He admits he was confident his firm would handle CRM2 with aplomb because the firm is conservative, has a simple fee structure and actively avoids conflicts of interest. CRM2, he thought, would probably be similar to Y2K: much ado about nothing.
But pitfalls abound.
“This is the biggest client-facing regulatory change since CRM1,” says Billick.
Read: 7 myths about CRM2
Be prepared for clients’ visceral reactions when they see fee disclosure, he warns. After his clients were given a mock-up fee report, they expressed shock and surprise.
Clients don’t understand fees expressed in dollar amounts versus percentages, he says, or MWRR (money-weighted rates of return) versus TWRR (time-weighted). Not only must advisors learn to present new information to clients, they must learn to effectively answer the question, “What am I getting for my money?”
That client question raises another concern: the “commoditization of advice.” Billick says advisors must learn to counter cocktail-party chatter — the inevitable compare and contrast conversation among investors when they discuss returns and fees.
Those who did well with CRM1, said Billick, were firms who embraced the model as a way to tell the firm’s story. Firms must figure out their value by asking, “What do we do that’s not commoditized?”
Read: A CRM2 checklist for dealers
View from the regulator
Christopher Jepson, senior legal counsel at the OSC, put the new requirements in context, explaining that lessons learned from behavourial economics shaped CRM2’s content. For example, the average investor is unsophisticated and makes emotional decisions.
With CRM2, “clients will be better equipped to work effectively with their advisors […]. CRM2 represents an opportunity to demonstrate the value of advice in the ongoing conversation with the client […]. Advisors [won’t] succeed unless they make some informed decisions about how to communicate with their clients. The end users, which are your advisors, need to be involved, not just your compliance and your IT people.”
Read: CRM2 could cause irrational client behaviour
He stresses disclosure documents required under CRM2 form the basis of meaningful client discussions, and are not “a mere exercise in black-letter box ticking.”
Michael Stanley, president and CEO at Quadrus Investment Services and a member of the CRM2 communications task force, highlighted tools to better understand CRM2 and communicate with clients, including IFIC’s Advisor Insights and online model reports.
Marsha Gerhart, vice-president of regulation policy at IIROC, discussed the flexible approach needed for IIROC’s various registrants, and she highlighted the annual reporting exemption for off-book clients.
To audience chuckles, she says new research suggests there are pitfalls to excessive mandated disclosure. “Let us make sure we are requiring disclosure where it is absolutely necessary and is germane to achieving those objectives of the CRM requirements,” she says, referring to giving clients sufficient and clear information for investment decisions.
And in case you’re wondering, Jepson confirms there are no plans for CRM3. “I get asked that a lot,” he says.