04/15/2016 04:00 EDT | Updated 04/16/2017 05:12 EDT

Why The New Client Relationship Model Misses The Mark

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The Client Relationship Model (CRM) is coming into effect in Canada with advisors and investors trying to digest the new retail investment industry standards. The Investment Industry Regulatory Organization of Canada's (IIROC) has described CRM as "a comprehensive reform package designed to promote transparency, enhance investor protection and raise industry standards. These objectives are critical to promoting confidence in the quality and integrity of investment advisors as a profession."

In essence, IIROC received approval by the Canadian Securities Administrators (CSA) in 2012 to begin implementation of its comprehensive reform package with the goal to enhance the relationship between investors and advisors. With phase one of the reforms completed, regulators have moved to phase two (CRM2) and a critical component of the reforms lies in performance reporting, impacting both advisors and investors.

Canadian regulators have to be commended for their effort to create transparency, always a herculean task met with significant resistance by market participants. Unfortunately, the reforms related to performance do not go far enough. The reality is that the field of performance has advanced to such a degree, that what has been proposed misses the mark of what can be achieved in order to achieve the previously stated objectives.


CRM2's decision to use the dollar weighted return methodology is significant and the idea behind it is to present the impact of deposits and withdrawals that investors make. However, by presenting only the dollar weighted return investors are only receiving one part of the message. The message lost is advisors' impact on performance, which is reflected in the time weighted return. Investors should be equipped with both return measures so they could evaluate the impact of their own decisions and those of their advisor.


CRM2 does not require a benchmark but it does not prohibit one either. A benchmark can be considered a passive representation of a portfolio strategy and is a gauge used to partially isolate the decisions made in managing a portfolio. If an investor's portfolio replicates a benchmark, the S&P/TSX for instance, then no active management is required because the investor can simply purchase an ETF.

With CRM2, benchmark standards leave too much room for the selection to be improper. One of the requirements is that it should be "a widely held and recognized benchmark" without any mention that it also represents the same risk-return profile. Take a situation where tan investor's small-cap stock concentrated portfolio is up significantly while its S&P/TSX benchmark is down. This highly misleading situation could theoretically occur under CRM2 and would provide no value in the performance feedback to the investor.


The report will not provide a breakdown of the amounts paid to the advisor. In addition, if a client holds investments in mutual funds, the costs of managing the mutual funds (i.e. management fees, etc.) will not appear in the Report on Charges and Compensation. Those fees are embedded in the NAV provided by the mutual fund. As such, this additional cost will not be available to clients. Clients will still be required to perform their own calculation of the additional costs they paid if they want a complete fee picture.

Risk Profile

There's very little mention of any tangible tool to properly measure and evaluate a client's risk profile. From a performance point of view, risk can be considered as the uncertainty of meeting investor objectives. To monitor the progress of investor objectives, these tools play a key role in managing portfolio risk.

Questionnaires are only one part of the risk assessment but (in this day and age) there are numerical tools that quantify risk and allow for its ongoing monitoring. As well, risk-adjusted return measures such as M3, Sharpe Ratio, Standard Deviation, and Treynor Ratio are all available for usage by advisor firms. However, CRM2 falls short in advocating them for investors.

Performance Reporting

Under CRM2 investors will receive annual reports that include basic information but very little insight to evaluate their investment portfolio and the advisor managing it. Instead investors will be provided with information around the change in the dollar value of the portfolio in addition to limited multi-period returns. With this narrow information set investors clients are missing out on reporting that would provide a comprehensive story. An enhanced view would require a consolidated report, where all accounts are grouped into one, which is a better gauge of the progression of the investor's overall wealth.

As well, performance should be presented on a monthly basis over 1-year with dollar weighted returns and time weighted returns displayed side by side. In addition, the net contributions (withdrawals) should be illustrated as it related to dollar weighted returns. This increased transparency would enhance discussions between advisor and investor.

Lastly, returns should be broken down by asset class, sector, and country (or region) which would provide investors with further information about specific advisor investment decisions. Over time, investors will become educated and their empowerment will eventually ensue.


Although we commend regulators on their effort, we feel that the performance requirements under CRM2 are not sufficient to meet the stated objectives. Why has it taken so long and why hasn't there been a more comprehensive and worthwhile change implemented? Fear.

Transparency creates fear within people and in this case, it creates fear for advisors since their clients would be empowered to ask more questions, challenge them and complain more if they felt that they were not being serviced properly. Taking it one step at a time so many people feel comfortable by keeping transparency to a minimum is not the best approach. A more aggressive response is required because the retail industry lags so far behind the current state of the investment performance field.

Providing unbiased numerical tools with the proper education, for both advisors and investors, will create a transparent environment where investors would truly be able to evaluate the progress of their portfolio.

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