Annual Performance Reporting, CRM2, CRM2 Performance Reporting Workshops, CRM2Plus, CRM2Plus Software, Financial Advisors

CRM2 – A Brief Overview

CRM 2 is a new set of financial rules that has been implemented to ensure investors receive standardized information about the cost and performance of their investments.  Beginning July 15th, 2014, firms are required to disclose charges and compensation from trades.  By July 15th, 2016, it will be mandatory for advisors to provide investment performance information to clients.  This will entail an annual account performance report, which will include the annualized total percentage return for the client’s account, with text, tables, charts, explanatory notes and a definition of total percentage return.

In addition, and as a means of expanding relationship disclosure, clients must be provided a general explanation of benchmarks and whether the registered firm offers any options for benchmark reporting to clients.

From blg.com:

ANNUAL PERFORMANCE REPORTING

Registered firms will be required to provide clients with an annual account-based investment performance report that can be either part of, or accompany, a quarterly account statement, or be

provided within 10 days of the delivery of a quarterly account statement. This requirement will not apply to a dealer in respect of a client’s account in which the dealer executes trades on the instructions of an adviser acting for the client, nor will it apply to accounts for “permitted clients” that are not individuals. These disclosure requirements will be effective on July 15, 2016. The report must contain text, tables and charts and explanatory notes. The essence of the annual performance report is that clients would be shown the opening market value of an account, plus deposits into the account, less      withdrawals from the account (at market value), which would be compared to the closing market value of the account to determine the change in value of their account over the past 12-month period and also since the inception of the account. Investors will then know how much money they have actually made or lost in dollar terms. This information will be enhanced by disclosure of mandated performance numbers (one, three, five and 10 year (or since inception if less than10 years)).

The disclosure in the annual performance report will be required to include:

  • The market value of all cash and securities in the account at the beginning and end of the 12-month period covered by the report.
  • The market value of all deposits and transfers of cash and securities into the account and the market value of all withdrawals and transfers of  cash and securities out of the account, in the 12-month period covered by the report.
  • The annual and cumulative change in value of the account, calculated according to specific formulas.
  • Annualized total percentage returns calculated using a “money-weighted” rate of return calculation method for specified time periods – one, three, five and 10 year periods and “since inception period” – periods of less than one year cannot be annualized. Special rules will apply to accounts opened before July 15, 2015.
  • The definition of “total percentage return” and a notification that the total percentage return in the

investment performance report was calculated net of charges, and an explanation of the calculation method.

  • For scholarship plans (group RESPs), specific risk and cost disclosure that is unique to these investment vehicles.

Disclosure must be presented on “nominee name” securities separately from “client name” securities.

Significantly, the CSA encourage dealing representatives to meet with clients to help ensure they understand their investment performance reports and how the information relates to the client’s investment objectives and risk tolerance.

Currently, most annual statements from brokerages, mutual fund companies and financial advisors do not include an investor’s personal rate of return – the internal rate of return or the dollar-weighted rate of return. Often, investors are left to their own devices to try to figure that out. And, most clients are ill equipped to understand the new information outlined under CRM II. What are the fees associated with an investment in a mutual fund?  What is a rate of return?  What is volatility?  What is tax efficiency?  What are the fees, returns and volatility of a comparable investment?  While investment professionals generally have an intuitive understanding of each of these terms, they are likely unfamiliar to clients.  Very fundamental explanations of each of these concepts must be given to clients, along with the CRM II mandated disclosures, to avoid misunderstandings and misinformation. The advisor must be able to create an explanatory narrative – to ensure the client’s understanding and answer all the questions that will be raised to and by the client. Thanks to Microsoft Excel as well as the ground-breaking IRR software, CRM2Plus, developed by ESCTT, advisors are equipped with analytical tools that will facilitate performance reporting and explanation.

Join us at one of our fully comprehensive, hands-on workshops and we’ll show you how to create clarity for your clients. And, visit us at our booth at Being Gold: The 2014 CFP® Professional Symposium on November 19th at Arcadian Court, 401 Bay Street in Toronto.  We look forward to seeing you there and answering any questions you may have about our new course offering and software!

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