There are many opportunities lying within the challenges presented by Canada’s incoming CRM2 rules, particularly in using performance reporting to enhance client engagement, experts tell Family Wealth Report, in the second section of a two-part feature.

See part one here.

The Canadian wealth management industry does seem to be broadly behind the “spirit of the law” when it comes to CRM2, but there is no doubt that there are significant challenges in adhering to the “letter” of it. “People are obviously taking this seriously, but it’s consuming an awful lot of time,” said Rebecca Cowdery, a compliance specialist at law firm Borden Ladner Gervais. In her view, the chidings of investor advocacy groups that institutions have lacked impetus need to be tempered with an acknowledgment of the “incredible amount of detail” CRM2 calls for. And, as well as the effort involved in the exercise, there is of course the sheer expense for firms to contend with too – both in terms of direct and opportunity costs.

PwC has predicted that 7 per cent of wealth management revenues globally will be eaten up by compliance costs in 2015; large banking groups are spending in the hundreds of millions on compliance each year and it is not unusual for a tenth of total headcount to be dedicated to this function today. It would therefore seem incumbent on institutions to try to garner as many business benefits as they can from the process of updating their systems and working practices. Taking necessary technology upgrades as a chance to maximize operational efficiency, minimize compliance risk and improve client satisfaction will go a long way towards making these investments look like just that, rather than another dead cost.

Indeed, some Canadian wealth managers have vocally welcomed CRM2 as a chance for the “good to win out” once full transparency over costs and performance is in place across the industry – which is, of course, the ultimate aim of the reform program. “From a business perspective, not only are we pleased that standards are put in place that make compliance and disclosure more comprehensive for both the firm and the individual advisor, we are also pleased that the competitive landscape is now on a more even playing field,” said RBC Wealth Management’s CEO for Canada, David Agnew. “This will make it much easier for clients to compare investment firms when assessing the overall wealth management experience and value provided.”

Mike Hendy, VP for North America for reporting technology provider SimCorp Coric, is certainly seeing the more proactive Canadian wealth managers recognizing that within the challenge of meeting the CRM2 requirements (and specifically the move to money-weighted rate of return) there also lies a real opportunity to increase client satisfaction and engagement through technology. But there is also a need for firms to look ahead to how client preferences are likely to evolve, as well as to anticipate additional strains which may be put on their systems to satisfy these demands.

First of all is the question of how to present information meaningfully to clients and explaining the rationale behind the new performance calculation methodology. Here, the capabilities offered by modern systems to customize how data is presented, to bring in models and charts - and to do all of this on mobile devices - will clearly confer serious advantages. As clients adjust to a new way of viewing investment performance against costs, it seems likely that customizability will play an important role in bedding down the changes effectively and showing them where the institution has added value.

It seems as if the “ideal” CRM2 reporting template is still very much a work in progress, however. As Cowdery notes, the Investment Funds Institute of Canada and the Investment Industry Association in Canada are currently working with their members to develop effective formats. One issue firms are grappling with is whether continuing to present the old (TWRR) performance calculation alongside the new (MWRR) one will alleviate or aggravate confusion. Many firmly believe the latter is the correct route, particularly consumer groups. “FAIR Canada has always recommended providing both the time-weighted and dollar-weighted calculation, accompanied by an appropriate explanation of the difference between the two,” explained Neil Gross, executive director of the consumer activist group FAIR Canada. In fact, a number of firms have highlighted in the press that they have already begun presenting “double” reporting in just that way well ahead of time.

Meanwhile, consumer finance journalist Bruce Sellery believes that there is ample scope for wealth managers to do much more and get really creative about what it is they are trying to say to clients through their performance reporting – which is, lest we forget, a key communication and probably the main proof point of the relationship. “If I was the advisor, what I’d be trying to communicate is value,” said Sellery. “In my dream world, that statement would include a holistic view of the client’s goals, so that when they look at their statement, they are not looking at performance, they are looking at progress towards their goals.” Hendy, meanwhile, agrees that he is starting to see increased interest in what he terms “goals-based reporting”, although the actual readiness of Canadian wealth managers to provide this kind of reporting remains relatively low in his view.

Investments into solutions that satisfy 2016 requirements are just happening now, Hendy continued, noting that while interest in enhanced reporting has been ticking up since 2008 - amid changes in compliance and technology and a renewed focus on client service – many wealth managers are still playing catch-up. “Historically, client reporting was thought of as a low-profile, back-office process, and investments into reporting often lost funding to other initiatives because of this,” said Hendy. Yet attitudes have been changing radically as wealth managers have become more focused on achieving near-term return on investment from regulatory projects like CRM2, he continued. Firms are using the opportunity to increase operational efficiency, as well as generate more meaningful and engaging reporting as a means to enhance the client experience and thereby increase the retention and acquisition of assets. “European firms have been doing this for years and North America is beginning to follow their path,” said Hendy.

As Hendy points out, however, the ability of wealth managers to provide goals-based reporting will depend in large part on whether they have the data required ready and in a useable format. Data management and systems integration can be particularly challenging in a goals-based reporting context due to the number of disparate systems involved. Furthermore, both clients and advisors need to be equipped to draw accurate and meaningful conclusions, in context, from the valuations provided – an educational process which will take time. It therefore seems likely that while goals-based reporting might represent the “final destination” on client reporting, many wealth managers may lean strongly towards simplicity at first. “People understand that it’s best to try and make these reports in plain language and as useful to their clients as possible,” said Cowdery, who fears – like many – that too much granular detail may completely turn many clients off.

That said, in other regimes - such as the UK - moves towards greater transparency over fees and costs have been seen to fuel further client appetite for more information and a better sense of the value delivered. It therefore follows that systems and processes will need to have a significant degree of “flex” built in so that firms can accommodate changing client preferences around how they see performance and costs. For some clients, simplicity might be their initial preference, yet the democratization of investing information facilitated by the internet has created a trend towards very much more empowered, informed investors - and wealth managers have to be ready to cater to their demands for sophisticated reporting.

It therefore seems likely there is a slightly defensive element to the big investments in reporting that some of the biggest Canadian wealth managers are known to have been making – and not just in terms of avoiding regulatory censure. Firms are likely to see clients wanting to keep a much closer eye on their portfolios when the new performance and cost reporting regime comes into force, particularly if previous positive performance has “turned” negative, or if a full breakdown of all costs and charges comes as something of a shock. For wealth managers, being able to customize reporting information so that the client sees what they want to see, in the format and level of detail they want to see it in, will be key to cementing relationships through CRM2.

More importantly, amid the upheaval firms will need to be ultra-responsive and able to clarify their clients’ understanding on demand. Therefore, being able to produce reports speedily – not to mention ad hoc via mobile devices - could be crucial in attracting and retaining clients in a post-CRM2 environment. There is clear precedent south of the border indicating this will be the case: at the end of 2014, CEB TowerGroup found that 79 per cent of US asset managers believe their firm’s reporting system delivers “high value”.

Squeezing maximum value out of enforced compliance changes is a running theme in wealth management globally today – whether that be through controlling costs and business risks, or improving the client experience. But there are also branding and marketing opportunities which haven’t really been seized as yet in Canada, said former marketing executive Bruce Sellery. “I am really surprised that the institutions have not gotten ahead of this and said, ‘We are going to own this and be the rock star firm that communicates the value of CRM2’”, he said.  

As Sellery points out, there is a big element of “selling” the changes to clients since “terms like ‘dollar-weighted percentage return’ may cause some clients’ eyes to glaze over as they dread yet another list of financial acronyms to learn”. Yet if the Canadian industry looks towards markets which have already gone through their regulatory overhauls, there may be lessons to be learned, according to Marco Galvan, head of the newly-opened Canadian arm of Asset Risk Consultants. “We believe that the wealth management industry in Canada will follow a similar path to the UK,” he said. “Some investment managers, prior to the Retail Distribution Review in the UK, understood that by providing not just transparency on the performance a prospective client could experience with them, but also the way in which this was achieved, was a way to improve client satisfaction.”

While the UK’s Retail Distribution Review (RDR) reform program differs in its detail, it shares the same broad aim as Canada’s CRM overhaul: enabling investors to discern more easily when they are getting value for money. For those firms not delivering particularly good value then CRM2 will be a day of reckoning. For those which are, it will be a chance to underscore the value of their proposition, along with their commitment to treating clients fairly and empowering them as consumers. For David Agnew, CEO of RBC Wealth Management in Canada, it comes down to the fact that investors “want to know they have choices”.

“We believe the new CRM2 rules are positive for our clients, our industry, and ultimately our firm. The new requirements will provide an additional opportunity for our advisors to provide clients with greater understanding and transparency of the costs and performance associated with their investments,” said Agnew. “We strongly support investor choice, and believe that investors should be able to select the advice and service model that best suits them depending on their available time, interest and/or knowledge. The choice is in the hands of investors, where it belongs.”

So, while there have been inevitable bumps in the CRM2 road, it seems that forward-thinking wealth managers are already very much on their way and “on message” when it comes to the reforms. Now, with little over a year before CRM2 goes live, it will be interesting to see if any institutions do attempt to become the “rock star” of reporting Bruce Sellery believes could emerge; and how far those currently holding back on CRM2 preparations will be able to benefit from last-mover advantage. From the nuts and bolts of technology upgrades, to finding the creativity required to communicate changes effectively to clients, there is clearly still much work to be done for Canadian wealth managers – and so all to play for when it comes to owning what might be called the CRM2 space.