CRM2: Uncovering the Full Story

By Grant Hicks, CIM

(This article is reposted with permission of the author. It was originally published here.)

By the time Canadians read their new CRM2 statements, they will learn the cost of advice and fees, and the performance of their investments. But are they getting the whole story?

In most cases, for fees in particular, it is only half the story. They will see the fees for services (planning, advice, dealer fees etc.). But mutual fund management fees are excluded from the new statements as they are not part of the core mandate of CRM2. So for financial advisors who sell mutual funds in Canada, Fund Facts must be part of the discussion. Fund Facts being, of course, the summary disclosure document required to be filed by all mutual funds in addition to other regulatory disclosure documents such as the Simplified Prospectus. But are Fund Facts in dollars or percentages?

As a client, do I get a dollar figure for planning and advice fees, and then the investment management fees in percentages? Sounds confusing already.

Understanding performance reports

Then there are the performance reports. Clearly this is only half the story, as Canadians will think that performance, not planning and advice, is the only value the advisor delivered. The statements will focus people on half the story: performance, not planning and advice. But what happens if they find out the whole story from someone other than their financial advisor? What happens to the trust with the advisor? Does the trust level go down when they learn it from another advisor?

As a client, I’d be wondering: what else is my advisor not telling me? It should be easy to get a straight answer: what does it cost and what do I get?

The key question advisors should be asking is….

The question financial advisors should be asking is: “what happens when investors find out the whole story?” CRM2 provides Canadians with a high degree of transparency. It will also come with a high degree of confusion. In my workshops with financial advisors, I ask “What does the term total mean to you?” “Total,” according to Wikipedia, means “comprising the whole number or amount.” Synonyms are entire, complete, whole, full, comprehensive.

But is it the total? How will Canadians know if it is the total or not? On the statement it says “total charges and compensation.” If it is not the total, then what is the total? What is not included? It may be half the story. What about segregated funds? I own segregated funds and how do their total fees work? So I am curious and ask my advisor: “What are the total fees on these accounts, and what is the performance on all these accounts?” Are your clients only getting half the story?

How do you get paid?

In workshops with advisors recently, I ask top financial planners a simple question: “In 20 years in business, how many quality financial plans have you seen from competitors?”

The answer shocks the whole room. It is usually 5 or less in 20 years. Wait a minute, we are in the planning and advice business, and the plan doesn’t exist? Are Canadians being underserved? How many people do you know who have a quality financial plan?

I am not talking about a simple plan in order to sell products. I am talking about a quality financial plan that has a client’s goals and values. A comprehensive plan that covers all areas of financial planning, including tax, estate, risk, insurance, investment and more. Can you do a quality financial plan without your clients values and goals on paper? Check out the goals list (from a previous article) and see how many goals you are getting on paper from your ideal clients.

Tell them the whole story

What is the approximate total cost of investment management and advice, in dollar terms and percentages? Do a fee audit exercise with clients and prospects so they understand the whole story. Then explain performance and goals. This will take the relationship from a purely performance-based relationship, to a performance-and-goals-based relationship. That is the whole story. It is helping your clients understand the two critical questions:

1. What does it cost (full story), and
2. What do I get (full story)

Because without the full story, how can you build trust and total transparency? Have a process, a written value promise, and a script. In workshops with advisors, I see a lot of advisors are winging the conversation. I do not see winging the answer as building trust for the long term. It is only a matter of time before clients sit down with a financial advisor, get a quality financial plan and get the whole story.