Ever since 2016, a document known as the Client Relationship Model – Phase 2 (CRM2), has governed the way that investment managers interact with their clients. Although it was not all implemented at once, it was designed to control the amount of information that must be related to the client before and after purchasing an investment package.
Up until that time, investment managers and brokers were not giving potential clients and clients a transparent picture of fees and other factors that would influence the outcome of their investments. This led to many disappointments on the part of investors as they saw much of their desired profit never materialize.
Two agencies that were responsible for the development of the CRM2 and later updates were the Ontario Securities Commission (OSC) and then the Investment Industry Regulatory Organization of Canada (IIROC). The second agency passed amendments to the first agency's new rules that caused its rules to be implemented and spread over a three-year period – from July 2014 through July 2016.
The Goal of IIROC's CRM2
The new CRM2 aimed to make much more information available to the client about their investments before investing their money. An earlier document – the CRM1 – that was implemented between 2012 and 2014, involved the fund manager to reveal three types of information that were unclear previously. It included:
- A disclosure of relationships
- A disclosure of any conflicts of interest
- A review of enhanced suitability
In addition to the above guidelines, the CRM2 sought to expand the transparency so that clients could get a better understanding of how well their portfolio is performing and what costs are being taken from the account. It also includes helping the client to understand why the choices recommended by the manager were given.
Factors that were attached to the client's investment account were largely hidden in the past. CRM2 now demands that much of the previously hidden information gets to the customer in a way that he or she can understand. The information needed to include text and charts and tables. The clarity aimed at helping protect clients by presenting a clearer picture of what is happening to their finances before and after invest.
This placed a much greater demand on those people that were making the sales presentations for investment products, selling them, and managing their money. They had to start presenting much clearer information to clients before the sale and regularly afterward.
IIROC CRM2 Know Your Client (KYC)
Before recommendations could be made by the seller of investment products, the agent would need to invest more time in understanding their client and their personal goals for investing. He or she could not act in the best interests of the client until it was known what their best interests were. This meant that the seller had to know some details about the client such as the client's tax information.
When conducting a market investigation to find products suitable for the client, the agent was now required to look through a significant amount of products. It was also necessary to inform the client whether or not the products being recommended are proprietary, or a mix of proprietary and non-proprietary products.
The details of the products being offered also had to be more deeply considered by the financial advisor before being submitted to the client. They needed to learn more details about any product before being presented or recommended. They had to consider the strategy of the product, its structure, features, and they had to know the costs and risks of each.
IIROC CRM2 Conflicts of Interest
Conflicts of interest also needed to be avoided unless it was truly in the client's best interest. Still, all possible conflicts of interest would need to be revealed to the client before a choice could be offered so that an informed decision could be made by the client.
IIROC CRM2 Assessments
After making the sale, the financial manager cannot simply let the account sit. They would now be required to conduct a suitability assessment every 12 months when no special events are triggering a sudden change. One would also need to be conducted when there is a significant event that would trigger sudden changes in the value of securities held in the account.
Clients also need to receive a statement on their accounts quarterly. In addition to the name of the securities being revealed, the client also needed to be given the cost of the position, information about the market value, and information about the deferred sales charge (DSC), which occurs when shares are sold back to the fund within a set period of time.
The report given to the client needed to report all total fees for the year, including all DSCs. A projection had to be given that reported percentage returns for periods occurring at 1, 3, 5, and 10-year periods, as well as the percentage returns since the account was opened.
Amendments to the CRM2
After the initial CRM2 document was released, recommendations were given to the IIROC to make some additional changes. They received more than 60 of them from the public and advisors. After an evaluation of them, the IIROC agreed that some modifications were needed. This resulted in the publication of the IIROC 2015 CRM2 Amendments, and later the IIROC 2016 CRM2 Amendments. All of the changes in the Amendments are effective.
Cost for Advice
If a client ever needed advice on their investment, the report to the client needed to reveal what to do. They also needed to be given the cost of getting advice and for other services.
Possible Exceptions
The CRM2 recognized that some types of securities would be difficult to provide all of the information required to be given to clients in some cases. In that case, it was recognized that all of the above information may not be able to be revealed because it would be impossible to know for certain. This included spreads on the foreign exchange and other securities that would be hard-to-measure. Securities, for instance, are regulated by the securities regulators, and this may make it hard to predict what could happen.
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