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Money matters – Investment Legislation

What you need to know about CRM II, and why


November 27, 2014
By Jim Sanderson

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It’s easy to see why more investors are reaching out to Canada’s
investment advisors as investment choices are growing and the landscape
is becoming more difficult to navigate.

It’s easy to see why more investors are reaching out to Canada’s investment advisors as investment choices are growing and the landscape is becoming more difficult to navigate. There is wealth to be won in growing markets, and Canadian investors want their share.

For example, the Toronto Stock Exchange (TSX), Canada’s largest exchange, had a market capitalization of $2.575 trillion (June 30, 2014) with a trading volume of 39.7 billion shares on the same date. Today, the Globe Investor Fund Filter yields approximately over 18,000 mutual funds (more than the total number of stocks in Canada) from which to choose. This is one of the main reasons people work with professionals, who help them wade through this quagmire of investment decisions.

The market candy store – come in and cash in?
It sounds a bit like a candy store. But as investors rush to cash in on growing investment possibilities, surveys have confirmed that many aren’t really sure how their investment advisor’s performance is measured, how much they actually pay them in fees – and what those fees cover.

Basically, many investors are relying on their advisor to guide them through what can be an investment maze, with little knowledge of the rules and safeguards that kick in once they become invested with them.

This explains in part the rapid growth of do-it-yourself investment books, blogs, software, subscriptions, fairs, articles and broadcasts where authors implore us to take charge of our destiny and take six weeks to learn what takes years of study and experience to even begin to properly understand, let alone build wealth on a consistent basis.

I work with many individuals in the aggregate and road building industries and have found some interesting similarities when analyzing their portfolios. Many people are unsure of what they pay in fees and how much their advisor is compensated on an annual basis.   When I asked them if they had a clear understanding of advisor fees and compensation, “I had no idea” or “I knew I was paying something but wasn’t really sure how much” were common replies.

Am I really getting my money’s worth?
Canadians have more than $3 trillion in financial wealth, and pay billions in fees and commissions each year. (Source: Tim Kiladze, Globe and Mail November 23, 2013.)

Given this fact, I see the value of new government legislation intended to make it easier for investors to work with their advisors in fast-moving and increasingly complex times. This legal legislation is intended to remove the mystery surrounding how advisors are paid and ensure advisors take well-defined steps to make the investment process easier to understand. It’s based on the belief that a client should know what they are paying for, how much they are paying and whether they got good value for what they paid.

This whole conversation focuses on the recently introduced Client Relationship Model (CRM) II, which is part of new Canadian Securities Association National legislation regarding clear disclosure of investment costs to investors, investment performance reporting and client statements.

A confident, trusting investor
I’ll briefly explain what’s involved in this initiative.

CRM II will affect the entire Canadian investment community. If you have an investment advisor, chances are that he or she will be legally required to bring clarity to investors regarding one or more of the above three categories.

Advisors who communicate clearly with their clients and have the technology and processes to keep their clients in the know won’t have to worry about the new legislation. If their client disclosure policies are unclear, their technology isn’t up to date and they are possibly non-compliant, they could face penalties or may leave the business altogether. 

CRM II is there to protect you and your investments. You will now be receiving information on the fees that you pay directly and indirectly as part of the management of your account.  An important hidden fee we explain to clients is the trading expense ratio (TEP).  When we analyze clients’ accounts, we pay close attention to this expense.  If you are invested in mutual funds that have a high turnover ratioS or trade stocks frequently, you are paying this expense and don’t even know it. CRM II will not report this fee. The bottom line is: trading costs you money.

I support this legislative change
The good news is that the new legislative changes can enhance relationships between clients and their advisors, as advisors are required to provide clients with more detailed information on investment performance and their compensation/fee structures. This takes the communication between the two parties to a higher level, and I support this legislative change.

For those advisors who have always believed in transparency and full disclosure, this will be a good opportunity to work even more closely with their clients who can now learn more about how their advisors work and support their financial goals.

While you may already feel confident that you are getting value for your dollar and may not be concerned with the small details, I believe you need to understand them – just as you understand each detail of your day-to-day business operations. This will give you even more clarity around your investments and the investing process.

Clients need to understand why advisors make the decisions they do
Having spent many years serving clients in the investment industry, I have some final, important observations to share. Being a skilled advisor involves more than protecting and growing a client’s wealth.

It is also about keeping clients in the loop on everything from how their investment returns are generated and measured to where their fees go. It is also about making sure that clients understand why you make the decisions you do in helping them reach their financial goals. Investing is unemotional to us. We make the hard decisions, and through a clear understanding of your goals, we work to keep you on the road through all the hills and valleys.  

Thanks to the changes brought about by CRM II, investors and advisors will soon be playing on the same field and speaking the same language, to their mutual benefit.  Out of the many problems that still need to be addressed, this one is solved.


Jim Sanderson is a wealth advisor with 28 years in the investment services industry. The Jim Sanderson Group at ScotiaMcLeod specializes in creating and distributing wealth for successful individuals and corporations in the aggregate and road building industries across Canada. He helps his clients supported by a team of experts in insurance, merchant banking, trust and estates. Jim can be reached at jim.sanderson@scotiamcleod.com and his website is located at www.jimsandersongroup.com.


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