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The lay of the land post-CRM2

Your clients are more fee-aware – and also believe in your value.

What happens when you fully disclose your compensation to your clients? In the lead-up to implementation of the final phase of the Client Relationship Model, Phase 2 (CRM2) in July 2016, many advisors weren’t sure what the answer to that question would be. Would clients be shocked? Would they be confused? Would they run for the exits?

As it turns out, none of the above. A comparison of the 2016 and 2017 results of an Investment Funds Institute of Canada (IFIC) poll1, completed by Pollara, shows that more investors understand that the fees they pay help to compensate their advisor and more investors strongly agree that their advisor boosts their return on investment. Similarly, a British Columbia Securities Commission (BCSC) study found that overall familiarity with the direct and indirect fees that investors pay rose between November/December 2016 and June 2017, while trust in advisors remained strong at 86 per cent. 

Yes, post-CRM2, clients can see what they pay their advisors, in black and white, on their statements. But thanks to the conversations advisors have initiated to explain their compensation, the effect on client-advisor relationships has been minimal. That’s not to say there isn’t still work to do. Keep in mind that CRM2 was only fully implemented in mid-2017. These early results are not indicative of a trend, but they are eye opening.

Keep the conversation going

The BCSC study also revealed that clients’ understanding of fees fades. Among respondents who completed three surveys, fee knowledge rose and then fell again. In November/December 2016, 22 per cent of respondents said they knew the total amount of third-party fees and commissions they pay. That proportion was up to 40 per cent in March/April 2017 – but had dropped back to 26 per cent in June 2017. This suggests the fee conversation has to be ongoing. 

Meanwhile, the IFIC poll found that a significant number of investors don’t recall talking about compensation, fees and commissions with their advisor. Just 52 per cent of respondents with an advisor say they discussed compensation when they were investing in a mutual fund, while 64 per cent remember discussing fees and commissions overall. Underscoring the necessity of these conversations, only 30 per cent say that “yes, definitely” some of the fees they pay for mutual funds go to their advisor; an additional 48 per cent say, “yes, I think so.” 

Perhaps even more surprising, given how much the industry as a whole has been preoccupied with advisor compensation disclosure, most investors appear not to have noticed that their statements contain new information. In the IFIC poll, just two in 10 respondents felt they were getting more information about dealer fees than in previous years, while six in 10 felt they were getting about the same amount of information. There is a clear opportunity for advisors to draw their clients’ attention to the extra level of detail in their statements – especially since 84 per cent of the IFIC respondents who understand that more disclosure is now required but who have not noticed changes to their statements are interested in getting more information about advisor fees, as well as performance and personal rates of return.

Graph of knowledge of fees among those who purchased mutual funds in the last year

Strengthen your bond with clients 

Another trend worth noting from the BCSC study is that clients’ satisfaction when it comes to their relationship with their advisor declined from 80 per cent in November/December 2016 to 76 per cent in March/April 2017 and to 71 per cent in June 2017. In better news, clients’ perception of value for fees dropped immediately after they received their first CRM2-compliant statements – from 67 per cent in November/December 2016 to 59 per cent in March/April 2017 – but had recovered to 62 per cent by June 2017. 

Both of these findings suggest that advisors would do well to continue to take proactive steps to strengthen their relationships with clients and demonstrate the value they add. How often you reach out to clients matters: in the BCSC study, those who communicated with their advisor more than once a quarter were most likely to say their general understanding of fees had improved. And an improved general understanding of fees correlates with an increase in the level of trust investors have in their advisor.

In the end, CRM2 doesn’t appear to have rocked the industry by sending investors into the arms of online brokerages and robo-advisors. After all, the IFIC poll found that only 27 per cent of respondents who had heard about online brokerages are likely to use one, and only 19 per cent of respondents who had heard about robo-advisors are likely to use one.

That’s in part thanks to advisors’ commitment to communicating clearly with clients about what they’re paid and – equally important – why they’re worth the money. Although there’s still work to be done, you made sure you were ahead of the curve by having these important conversations before clients received their first post-CRM2 statements. Now you have an opportunity to stay ahead of the curve by continuing to educate your clients about what they pay and what they get in return. That’s good for your clients – and, in an industry that has ridden out CRM2 but that remains very competitive, it’s good for your business too.

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