How CRM2 and the New Regulatory Environment Will Impact ... conference May 5 - CRM2 and... · How CRM2 and the New Regulatory Environment Will Impact Advisors and Their Practices

HowCRM2andtheNewRegulatoryEnvironmentWillImpactAdvisorsandTheir

Practices

May5,2016

Takenfrom:“Module1– CRM2Basics”,©CRM2Navigator,2016

Presenters:

• SusanSilma,Co-FounderofCRM2Navigator

• NaomiSolomon,ManagingDirector,InvestmentIndustryAssociationofCanada(IIAC)

• AlexanderDaschko,CCO,CAO&GeneralCounsel,CygnusInvestmentPartners


Agenda

• OverviewofCRM2

• What’schanging,whenandwhy

• Whatadvisorsandclientssay

• IIACSurveyResults

• CRM2RegulatoryUpdates

• What’sNextinCanada

• TheInternationalLandscape

CRM2–Why,WhatandWhen


RegulatoryTimeline

June 2014

Dec2016

June 2015

June 2016

Dec2014

Dec2015

June 2014 (POS)Fund Facts document replaces the prospectus for post-sale delivery

May 2016 (POS3)Fund Facts documents delivered pre-sale

July 2016Provide fee and performance disclosures

All transaction costs, including DSCs, reported on trade confirmations

December 2015Enhanced account statements include better information on:• Position cost• Market value• Deferred sales charges

July 2014All transaction costs must be disclosed pre-sale


CRM2+POS3–RevisitingPre-TradeDisclosure

• 2014CRM2pre-tradecostdisclosurerequirementsarealreadyineffect

• May30,2016:PointofSale3– Pre-saleDeliveryofFundFacts

• Recommended:integratepre-saleCRM2requirementswithyourPOS3obligations

2016:PerformanceandFee/ChargeReporting


PerformanceReporting– WhatisRequired

• Money-weightedratesofreturn(netoffees/charges)

• For1,3,5and10Years,andSinceInception

• ChangeinValueTable

• Covering12-monthperiod

• FirstreportingperiodmustincludeJuly15,2016

• MostclientswilllikelyreceiveareportcoveringJanuary1,2016– December31,2016


PerformanceReportingChangeinvalueovera12-monthperiodandSinceInception

Money-weightedratesofreturnfor1,3,5and10years,andSinceInception

FirstreportingperiodmustincludeJuly15,2016.


PerformanceReporting– KeyConcepts

“Inception”date


Performance– ClientReactions

Whenshownsampleperformancedisclosures,clientshadthesereactions:

“This is what I get for the fees I pay?”

“I want to know the dollar value of my portfolio and whether it’s up or down.”

“Who’s better off – me or my dealer/advisor?” “Tell me how I’m doing

compared to my goals.”


Performance– AdvisorReactions

Advisorshaveexpressedconcernsabouthowtorespondtoclientsregardingthenewperformancedisclosures:

“It’s difficult to have conversations about under-performing investments.” “How do I explain

time-weighted vs. money-weighted returns?”

“We’ll lose if all we try to do is differentiate from a return perspective.”


FeeReporting– WhatisRequired

• OperatingFees

• TransactionFees

• TotalOperating+TransactionFees

• PLUSCompensationfromThirdParties– i.e.TrailerFees


FeeReporting

3typesoffeeswillnowbeincludedonaclient’sannualstatement:

2.Transactionfees

3.Compensationfromthirdpartiese.g.TrailingCommissions

1.Operatingoraccountfees


FeeReporting– ClientReactions

Theindustryhasdonesomeresearchtoseehowclientswill reactwhentheyseethenewfeedisclosures.Here’swhatwe’rehearing:

On seeing fees for the first time:

“I’ve never understood this, yet it’s important!”

On seeing fees and performance together:

“Who’s better off – me or my dealer/advisor?”

On assessing value for fees:

“I don’t care how much it costs as long as I made a whole lot more.”

On seeing embedded fees in dollars:

“Shocked” “Surprised” “Embarrassed”


FeeReporting– AdvisorReactionsAdvisorsarealsoexpressingconcern– aboutclientreactionstothenewlydisclosedfees:

“I don’t want fees put in front of their nose!”

“Linking fees to performance where there is a lack of understanding will create negative outcomes in the client/advisor relationship.”

“Need to change perception of the client that we’re being paid to do transactions.”

“I’d like to see my clients get away from comparing their portfolios to other people’s and focus on what they want and need to achieve their future goals…”


AnticipateClientQuestionsAboutFeesandPerformance

Arethesefeesnew?

Whatdoesthedealerfirmdotoearnthefees?

Doesmyadvisorkeepallthesefees?

Formutualfunds,doesCRM2feereportingcovertheMER?

Whatismoney-weightedrateofreturn?

WhatdoIgetinreturnforthesefees– theperformance?

AmIontracktomeetmygoals?


SoWhatIsTheCRM2Opportunity?

Wewanttobeonthereceivingendof“MoneyInMotion”

Todothat,weneedtochangetheconversation:

FROM

Howaremyinvestmentsperforming?

Whatisitcostingme?

TO

Howaremyinvestmentsperformingrelativetomygoals,andrelativetomyappetiteforrisk?

Whatvaluedo Ireceive forthefeesIpay?

CRM2isnotprimarilyabouteithercostorperformance.It’sprimarilyaboutVALUE.

Takenfrom:“Module3– CommunicatingwithInvestors”,©CRM2Navigator,2016

CRM2Tipsü Talktoyourclientsabout feesandperformance–

startingnow– anddon’t letthefirsttimetheyseetheinformationbewhentheCRM2reportsarriveandyou’renottherewiththem

ü BesureyouunderstandandcanarticulateyourValueStory– andtellit!

ü Useeveryopportunity tocommunicatewithyourclients– not justonceayear

ü UsetheFundFactsasapropinyourCRM2pre-tradecostdisclosure

ü SharethedesignoftheupcomingCRM2Reportswithadvisorssotheyknowwhattoexpect.


DealersShouldAssessAdvisorToolkitDoadvisorsneedbettertoolsandsupporttohavecomfortable,confidentconversationsaboutfeesandperformance?Forexample:

• HowtodiscussCRM2feesvsMERs• Explainingfeesinadownmarket• UnderstandingMWRRvsTWRR• WhatValuemeanstoaclient

Helpadvisorsunderstand,articulateanddeliverValue• Craftingavaluestory• WhatIdoformyclients

Dotheycommunicatewellandoftenwiththeirclients?Doesthefirmsupportthis?• At-riskclientidentificationandsegmentation• Scriptsandtemplatesthatsupportoutreach• Relevantcontent• Bestpracticesincommunicationsthroughoutaclientrelationship

CRM2– ASurveyoftheIndustryIIACsurveyedtheindustryonCRM2inSeptember,2015andagaininApril,2016.

Question September 2015 April 2016

Usingcalendar2016forfirstPerformanceReport(PR)? 89% 97%

Earliest“sinceinception”date,i.e. providinghistorical PR?

• 50%onlyfromJan.1,2016

• 25%usingotherdateswithin7years(e.g.Jan.1,2009,2010,2013)

• 62.5%onlyfromJan.1,2016

• 30%usingotherdateswithin5years(e.g.Jan.1,2011,2012,2013)orsinceaccountopen

InadditiontoprovidingMWRR,willyourfirmprovideTWRR?

• Over 40%onlyMWRR• RemaindersplitbetweenlimitingTWRRtomanagedaccounts,providingadhocoratregularperiodsincludingannually

• No significantchange



Which “non-security”productswillbeincludedinPR?

• 90%GICs,• Over60%PPNs, CSBs• Over50%Seg Funds(7%willexclude)

• 68%HighInterestSavingsAccounts(HISA)

Remainderwouldincludewhensystemspermitordidnotoffertheproduct.

• 75%GICs• Over60%PPNs, CSBs• 47%PAR• 44%Seg Funds(12.5%donotknow)

• 74%HISARemainderwouldincludewhensystemspermitordidnotoffertheproduct.

Remuneration forwhich“non-security”productswillbeincludedinfee/chargesreport(FCR)?

• 52%GICs• 42%PPNs• 29%CSBs• 26%Seg Funds• 68%HISARemainder – under20%wouldexclude,under20%woulddosowhensystemspermit,ordidnotknoworoffertheproduct.

• 69%GICs• 42%PPNs• 55%CSBs• 43%PAR• 31%Seg Funds• 62.5%HISARemainder– 7%wouldexcludeseg funds,butotherwise includewhensystemspermit.



HowoftenwillFCRbeprovided? • 70%annually only • 76%annually only

WillbothCRM2positioncost(originalorbookcost)and“taxcost”bereported?

• 100%onlyCRM2positioncost(96%usingbookcostand4%usingoriginalcost)

• 85%onlyCRM2positioncost

• Lessthan15%indicatedbookvalue(“taxcost”)wouldbeavailableonline,orwhenusing“originalcost”,taxcostwouldalsobereported.

Ifanaccountcloseswithinthereportingperiod,willFCRbeprovidedfortheclosedaccount?

• Notasked • 57%yes• 43%No

HowpreparingandsendingPRandFCR?

• 50%would integrateinto1documentwithclearseparationofreportsandincludeaccountstatement.

• 43%would integrateinto1documentwithclearseparationofreportsandincludeaccountstatement.

CRM2– ASurveyoftheIndustry


• Over15%would integratereportsinto1documentwithclearseparationwithout includingtheaccountstatement.

• 20%wouldprovidetworeportsseparatedbut inthesamedeliveryandsendtheaccountstatementseparately.

• Under15%wouldkeepeachreportandaccountstatementseparatebut inthesamedelivery.

• Over7%would integratereportsinto1documentwithclearseparationwithout includingtheaccountstatement.

• 21.5%wouldprovidetworeportsseparatedbut inthesamedeliveryandsendtheaccountstatementseparately.

• 25%wouldkeepeachreportandaccountstatementseparatebut inthesamedelivery.

Provideconsolidatedclient-levelreportingand/orhousehold-levelreportingforPRandFCR(plusaccount-levelreporting)forclientswithmorethanoneaccount?

• Notasked • 29%willdoconsolidatedclient-levelplusaccount-levelreporting

• 68%willdoneitherconsolidatedclient-levelorhousehold-levelreporting

• OnApril14,2016theCSApublishedanupdatedCRM2FAQinStaffNotice31-345– NetnewFAQs:

• Pre-trade-disclosure:q.10,11• MarketValue:q.13,15,16• Accountstatements:q.21-24• PositionCost:q.27-34• Fee/ChargeReport:q.43-45

CRM2– RegulatoryUpdates

SomeCSAFAQs:• Cananaccountstatementoradditionalstatementcovermorethanoneaccount?

Everyclientmustbeprovidedwithastatementforeachoftheiraccounts.However,afirmmayalsoprovideaconsolidatedyear-endstatementifaclienthasrequestedaconsolidatedperformancereport.

• Canafirmprovideavaluethatreflects“taxcost”insteadofCRM2positioncost?

Afirmmustprovidepositioncostusingeitheroriginalcostorbookcostasdefined,butafirmmayalsoprovidetaxcostinformationinadditiontopositioncost,solongasthedifferencesaremadecleartotheclient.


SomeCSAFAQs:• Fortransferredsecurities,canafirmrelyonpositioncostinformationprovidedbythetransferringfirm?

Yes,ifthetransferring-outfirmisalsorequiredtoprovidepositioncostinformationtoclientsandthereisnoreasontobelievetheinformationisnotreliable.

• Howshouldrebatedfeesbereported?Thefull(“gross”)amountchargedmustbereportedratherthanareduced(“net”)amount.However,afirmmaychoosetoprovidethenetamountalongwiththegrossamount,solongasitalsoincludesanexplanatorynote.


• OnFebruary4,2016theMFDApublishedBulletin#0678-Cwhichreviewedpre-tradedisclosurepracticesofMFDAdealers– Itwasrecommendedthatpoliciesandproceduresbedetailedincludingguidanceonhowtocomplywiththerequirementson:

• whattypesoffeesandchargestodiscloseincludingthoseproductsthatarenotsecurities;

• howfeesandchargesshouldbedisclosed,includinganyimpactofthetransactionthatdoesnotmeetthedefinitionofafeeorcharge(e.g.withholdingtaxesorothertaximplications);and

• howevidenceofdisclosureistobemaintained.


• IIROCCRM2FAQUpdate– willtacklethird-partycompensation,inparticulardisclosureofnewissuecommissionandreferralfees• DelayedduetodiscussionswithCSA,expectedinMay,2016


• OnApril28,2016theCSAissueditslatestConsultationPaper33-404onabestintereststandardforadvisors– alloftheCSAjurisdictionsareconsultingonasetofproposedtargetedreformstoNI31-103,and

– alloftheCSAjurisdictions,excepttheBCSC,areinadditionconsultingona regulatorybestintereststandard,accompaniedbyguidance,thatwouldformbothanover-archingstandardandthegoverningprincipleagainstwhichallotherclient-relatedobligationswouldbeinterpreted

What’sNextinCanada– CRM3,4?

• ProposedTargetedReformstoNI31-103:– ConflictsofInterest– Generalobligation– KnowYourClient– KnowYourProduct– Suitability– RelationshipDisclosure– Proficiency– Titles– Designations– RoleofUDPandCCO– StatutoryFiduciaryDuty- Clientgrantofdiscretion


• ProposedRegulatoryBestInterestStandardFramework:– Potentialguidanceasprovidedintheproposal.– InthecontextofCanadiansecuritieslegislation,abestintereststandardwouldbeformulatedasaregulatoryconductstandardandnotasarestatementorformulationofafiduciaryduty.

• Businessandregulatorycostsformarketparticipantsshouldbeproportionatetothesignificanceoftheregulatoryobjectivessoughttoberealized. Queryanticipatedimpact?


• InDecember,2015,MFDAissuedBulletin#0671– ConsultationonCostReportingforInvestmentFunds:– Proposesdisclosureofcostsofowninginvestmentfunds(orotherproducts)thatarenotpaidtothedealer,suchasmanagementfees,fundoperatingcosts,redemptionfeesandshorttermtradingfees.

– IIACcommentedonimplicationsoftheproposalforexpandedproductcostreporting;commentsarebeingsharedwiththeCSA.


Current Global Regulatory Landscape – U.S.

� Four Areas to consider:

1. Securities Exchange Commission (SEC);

2. Department of Labour (DOL);

3. Financial Industry Regulatory Authority (FINRA); and

4. Securities Industry & Financial Markets Association (SIFMA).


� March 2015� President Obama directive to the Dept. of

Labour;� resurrect a 2011 proposal to raise the investment-

advice standards for brokers handling retirement accounts (February 23, 2015).

� The SEC;� raise same standards in creating uniform fiduciary

standard for brokers and investment advisors,� should be “codified principles-based and rooted in

the current fiduciary standard for investment advisors” – SEC Chair Mary Jo White (March 17, 2015).


� However, SEC outlines challenges:1. How do you define that standard; 2. What’s required under that standard; and 3. How do you ensure compliance?


� Dept. of Labour Initiative (April 20, 2015):� Proposal requiring:

� fiduciary advice for retirement accounts� Expanding the types of retirement advice covered by

“fiduciary protections” � Prohibition on receiving certain types of commission,

including embedded (trailing) commissions� “Best Interest Contract Exemption” – allows firms to

continue to set their own compensation practices so long as they commit by contract with the client to putting their client’s best interest first and disclose and conflicts that may prevent them from doing so.

� Final version released April 6, 2016 (60 day limit for Congress to review)


� SIFMA Proposal� Best interest standard for dealer-broker (June

3, 2015)� Heightened standard for rules-based regulatory

approach to include:� Robust disclosure� Robust examination, oversight and

enforcement by the SEC, FINRA and state securities regulators

� Private right of action for investors

� FINRA Proposal� Key feature of a robust conflicts management

framework is the adoption of a best interest of the customer standard

Current Global Regulatory Landscape – Europe

� MiFID - Markets in Financial Instruments Directive - MiFID I launched in 2007:

� Retrocession Fees (i.e. trailer fees) - fully disclosed except in Italy; they are fully banned.

Current Global Regulatory Landscape – Europe

� MiFID II – key measures targeted for January 2018 implementation:

� independent advisers must refuse any third party payments (including inducements such as retrocessions);

� portfolio managers, must also refuse inducements when given a mandate to manage assets;

� a “dependent adviser” regime in which the current use of retrocessions is confirmed but subject to a heavy disclosure regime;

� Product governance requirements for investment firms; and

� Investment firms providing independent advice must assess a sufficient range of financial instruments

Current Global Regulatory Landscape – U.K

� UK - RDR Regime (January 2013):� Complete ban on retrocession fees for UK

based service providers;� Representatives must follow a code of

ethics, hold required qualifications, 35 hours of CE, professional standing from an accredited body

� FCA Handbook – “all registrants must act honestly, fairly and professionally in accordance with the best interest of the client”

Current Global Regulatory Landscape – U.K� BUT, “best interest” is qualified – depends on the

nature of advice given to clients;� Independent vs. Restrictive Advice:

� INDEPENDENT ADVICE – unbiased advice on a broad range of financial investment products

vs.

� RESTRICTIVE ADVICE – mainly on proprietary financial products (e.g. employee advising on company products) – must be done in writing and verbally before giving customer advice.

Current Global Regulatory Landscape – Australia

� Future of Financial Advice (“FoFA”) – Jul. 2013� Dealt with “best interest” and “conflicted

remuneration”.

� New Coalition Government elected in Dec. 2013 with an election promise to make changes to FoFA:

Current Global Regulatory Landscape – Australia

� “Best interest” still applies, but “catch –all” provision removed from a 7 point check list (i.e. “any other step that, at the time the advice is provided, would reasonably be regarded as being in the best interest of the client, given the client’s relevant circumstances”.).

� Exceptions included for scaled advice (e.g. Bank products by bank employees).

� “Conflicted remuneration” still banned.

Q & As� If time permits...

THANK YOU!

Documents

How CRM2 and the New Regulatory Environment Will Impact ... conference May 5 - CRM2 and... · How CRM2 and the New Regulatory Environment Will Impact Advisors and Their Practices