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FEATURE: Getting Ahead Of The CRM2 Curve – Part 1

Wendy Spires

28 April 2015

Last year, Family Wealth Report and reporting technology provider SimCorp Coric hosted a webinar assessing Canadian wealth managers’ CRM2 readiness and exploring what firms could do to turn these game-changing disclosure rules to their competitive advantage. Now, 12 months down the line, it seems that everything is still up for grabs in terms of getting ahead of the curve on “Client Relationship Model, phase 2”.

The Canadian regulator’s CRM reform program has been underway for several years now. Phase 1 was based around four strands: conflict of interest management, enhanced account disclosure, enhanced suitability assessments and greater transparency for investors. The second phase, focused on helping investors understand the total costs of investing and the performance they receive in return, is a key piece of the puzzle and the toughest part of the program.

But CRM2 also presents real opportunities for wealth managers to differentiate their offerings and strengthen relationships with clients if approached proactively, Canadian wealth management and technology experts recently told this publication. Therefore, while there has been a slight softening of deadlines, firms of all stripes should still be seizing the initiative.

Bumps in the road

Amid vocal consumer group opposition, the Investment Industry Association of Canada had its requests for a CRM2 extension only partially met. A compromise reached in February saw the deadline on certain changes on existing account statements pushed back six months to December 2015. However, new yearly investment costs and portfolio performance reports will still be required as of July 2016 – giving institutions a little over a year to put in place all the necessary plans around technology, training, cultural change and client education to start on a good footing. Furthermore, while institutions could wait until July 15, 2017, to send out their first new-style reports, many will want to start from December 2016 to cover a full calendar year at the earliest, most logical opportunity, as several interviewees pointed out. This means that timeframes could be even shorter for firms that want to grab early-mover advantage.

So what are Canadian wealth managers doing to try to wring competitive benefits from the need to meet new standards on annual reporting?

According to experts on the ground, the CRM2 deadlines are closer than they may appear for the under-prepared. “The big change will be the cost and compensation report, which will give investors - ideally in plain language - a sense of how much it has cost them to work with a particular firm and their advisor,” said Rebecca Cowdery, partner at law firm Borden Ladner Gervais. This shift will actually be easier for those firms which have already moved towards fee-based advice and so are disclosing full cost and charges information already. This is certainly the case at RBC Wealth Management, according to the firm’s chief executive for Canada, David Agnew. “Over the past decade, a growing number of our clients have determined that a fee-based account is right for them,” he said. “In fact, more than 90 per cent of our advisors are using some form of our fee-based accounts to manage a portion of their client portfolios.” The bigger challenge, therefore, comes from the fact that alongside their cost report clients are also going to be receiving a separate annual account performance report which, crucially, is to be calculated in a completely different way.


Moving to MWRR

The move from time-weighted performance calculations to money-weighted rate of return is intended to ensure industry-wide consistency and so make it easier for clients to make comparisons. “Performance calculation has always been a huge issue,” said Beth Hamilton-Keen, director of private client portfolio management at Mawer Investment Management. “We’ve long been arguing for that on behalf of clients – that there should be a consistent method of performance calculation so the client is not left wondering ‘How far have I come? What is my performance calculation if I were to try and compare or even measure how far I’ve come?’”

The move to MWRR is also intended to help clients better see progress towards their financial goals. As such, the change is to be welcomed as both an effect of the shift towards a financial planning-based approach in wealth management and a further driver of this long trend, according to Hamilton-Keen. However, as she points out, “It’s bridging the gap between theory and intention and practical application which becomes the challenge.” The change of performance calculation methodology seems to have caused a fair amount of consternation among wealth managers, in fact. The consensus view seems to be that – while the regulator certainly had good intentions – the change will lead to a lot of confusion. Many say the regulator should have tried to amend what firms were already doing rather than overhauling the method of calculation completely at a fell swoop.

As Rebecca Cowdery highlighted, explaining TWRR versus MWRR to clients is actually not that simple and may entail new concepts, along with necessitating more information about cash flows . Furthermore, the two calculations may yield two very different results – one positive, one negative even. This means that wealth managers face a real educational challenge: firstly, to equip their advisors to articulate the change well, and secondly to educate investors through other communication channels to support front-line staff fielding queries.


Questions, questions

It does seem inevitable that those firms which fail to lay the right groundwork are going to get a lot of questions when clients receive their first new-style reports. Efforts are of course being made to educate investors about CRM2; Rebecca Cowdery pointed to the Ontario Securities Commission’s educational initiatives and segments dedicated to the changes on the national news, for instance. However, it appears that awareness remains stubbornly low. “The average investor doesn’t even know the acronym exists, let alone what is stands for or what it means”, said consumer finance journalist Bruce Sellery. Meanwhile, Neil Gross, executive director of the consumer activist group FAIR Canada, believes that “most investors are probably completely unaware of CRM2”.

According to Gross, timeframes are a big issue. “The whole CRM project has been unfolding at a pace often described as glacial, so it’s a challenge building public awareness when the client-facing changes are still a long way off,” he said. Yet as well as making investors merely aware of the changes, the bigger challenge of encouraging real engagement with the rationale behind CRM2, and the ultimate benefit to clients that is intended, remains. “Unfortunately, securities regulators often seem to have difficulty speaking in language that average investors understand,” Gross continued. “This phenomenon is by no means limited to Canadian regulators, nor is it specific to CRM2: it’s a pervasive problem that requires careful attention.” If the authorities seem to be struggling to get the CRM2 “story” across well themselves, then it is hardly surprising that institutions may also have much work to do on this front – particularly when they are also grappling with the practical issues around implementation too.

Mike Hendy, VP for North America at SimCorp Coric, highlighted the fact that the wealth managers he encounters tend to rely on several separate systems for their reporting needs, from statements to pitch books and disclosures, which may come from different providers. This, he explained, means that changes need to be replicated through a number of separate platforms – an inefficient and expensive process that he believes many wealth managers have erroneously accepted as just part of the compliance process. “A wealth manager should be able to centralize this function, be assured of data consistency across all client communications and make regulatory changes in one place, eliminating wasted time and resource,” said Hendy. Given there are already expectations of a “CRM3”, which may see retrocessions abolished altogether, this kind of flexibility is likely to be top of firms’ shopping lists when they are assessing new systems.
    
“Based on our experience and conversations with clients, consultants and the regulatory community, it’s clear that global regulation, including CRM2, will continue to evolve,” said Hendy. “From a business perspective, it’s important to maintain maximum flexibility with the ability to accommodate any formatting, approval processes or distribution requirements. Larger firms also require significant scale to deliver communications to their client base, and to be able to adapt when client numbers rise through growth or M&A.” In short, wealth managers need to adapt to changes fast so that they can get back to core business. And they certainly have need: according to research carried out by SimCorp Coric, 90 per cent of North American wealth and asset managers are so hamstrung by a lack of automation in activities like reporting and meeting preparation that they can spend less than 20 per cent of their time in proactive discussions with clients.

Now, more than ever, Canadian relationship managers need to be freed up from administrative tasks and manual input to have more time to talk to clients about the incoming changes – to prevent damage to relationships and to improve them wherever possible too. “We have seen a great deal of interest in client reporting automation from firms that see CRM2 as an opportunity to increase transparency and improve client engagement, using this event as a differentiator to retain assets and win new clients” said Hendy. “Those wealth managers who own the CRM2 story will be far better positioned to guide their clients through the changes that CRM2 imposes, and ensure that their investment performance is communicated most effectively. Clients and prospects will also have greater trust in the firm’s ability to provide the level of compliance, disclosure and transparency that CRM2 is designed to provide.”