how crm2 and the new regulatory environment will impact ... conference may 5 - crm2 and... · how...
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Takenfrom:“Module1– CRM2Basics”,©CRM2Navigator,2016
Presenters:
• SusanSilma,Co-FounderofCRM2Navigator
• NaomiSolomon,ManagingDirector,InvestmentIndustryAssociationofCanada(IIAC)
• AlexanderDaschko,CCO,CAO&GeneralCounsel,CygnusInvestmentPartners
Takenfrom:“Module1– CRM2Basics”,©CRM2Navigator,2016
Agenda
• OverviewofCRM2
• What’schanging,whenandwhy
• Whatadvisorsandclientssay
• IIACSurveyResults
• CRM2RegulatoryUpdates
• What’sNextinCanada
• TheInternationalLandscape
Takenfrom:“Module1– CRM2Basics”,©CRM2Navigator,2016
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
Takenfrom:“Module1– CRM2Basics”,©CRM2Navigator,2016
CRM2+POS3–RevisitingPre-TradeDisclosure
• 2014CRM2pre-tradecostdisclosurerequirementsarealreadyineffect
• May30,2016:PointofSale3– Pre-saleDeliveryofFundFacts
• Recommended:integratepre-saleCRM2requirementswithyourPOS3obligations
Takenfrom:“Module1– CRM2Basics”,©CRM2Navigator,2016
PerformanceReporting– WhatisRequired
• Money-weightedratesofreturn(netoffees/charges)
• For1,3,5and10Years,andSinceInception
• ChangeinValueTable
• Covering12-monthperiod
• FirstreportingperiodmustincludeJuly15,2016
• MostclientswilllikelyreceiveareportcoveringJanuary1,2016– December31,2016
Takenfrom:“Module1– CRM2Basics”,©CRM2Navigator,2016
PerformanceReportingChangeinvalueovera12-monthperiodandSinceInception
Money-weightedratesofreturnfor1,3,5and10years,andSinceInception
FirstreportingperiodmustincludeJuly15,2016.
Takenfrom:“Module1– CRM2Basics”,©CRM2Navigator,2016
PerformanceReporting– KeyConcepts
“Inception”date
Takenfrom:“Module1– CRM2Basics”,©CRM2Navigator,2016
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.”
Takenfrom:“Module1– CRM2Basics”,©CRM2Navigator,2016
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.”
Takenfrom:“Module1– CRM2Basics”,©CRM2Navigator,2016
FeeReporting– WhatisRequired
• OperatingFees
• TransactionFees
• TotalOperating+TransactionFees
• PLUSCompensationfromThirdParties– i.e.TrailerFees
Takenfrom:“Module1– CRM2Basics”,©CRM2Navigator,2016
FeeReporting
3typesoffeeswillnowbeincludedonaclient’sannualstatement:
2.Transactionfees
3.Compensationfromthirdpartiese.g.TrailingCommissions
1.Operatingoraccountfees
Takenfrom:“Module1– CRM2Basics”,©CRM2Navigator,2016
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”
Takenfrom:“Module1– CRM2Basics”,©CRM2Navigator,2016
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…”
Takenfrom:“Module1– CRM2Basics”,©CRM2Navigator,2016
AnticipateClientQuestionsAboutFeesandPerformance
Arethesefeesnew?
Whatdoesthedealerfirmdotoearnthefees?
Doesmyadvisorkeepallthesefees?
Formutualfunds,doesCRM2feereportingcovertheMER?
Whatismoney-weightedrateofreturn?
WhatdoIgetinreturnforthesefees– theperformance?
AmIontracktomeetmygoals?
Takenfrom:“Module1– CRM2Basics”,©CRM2Navigator,2016
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.
Takenfrom:“Module1– CRM2Basics”,©CRM2Navigator,2016
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
CRM2– ASurveyoftheIndustryIIACsurveyedtheindustryonCRM2inSeptember,2015andagaininApril,2016.
Question September 2015 April 2016
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.
CRM2– ASurveyoftheIndustryIIACsurveyedtheindustryonCRM2inSeptember,2015andagaininApril,2016.
Question September 2015 April 2016
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
Question September 2015 April 2016
• 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.
CRM2– RegulatoryUpdates
SomeCSAFAQs:• Fortransferredsecurities,canafirmrelyonpositioncostinformationprovidedbythetransferringfirm?
Yes,ifthetransferring-outfirmisalsorequiredtoprovidepositioncostinformationtoclientsandthereisnoreasontobelievetheinformationisnotreliable.
• Howshouldrebatedfeesbereported?Thefull(“gross”)amountchargedmustbereportedratherthanareduced(“net”)amount.However,afirmmaychoosetoprovidethenetamountalongwiththegrossamount,solongasitalsoincludesanexplanatorynote.
CRM2– RegulatoryUpdates
• OnFebruary4,2016theMFDApublishedBulletin#0678-Cwhichreviewedpre-tradedisclosurepracticesofMFDAdealers– Itwasrecommendedthatpoliciesandproceduresbedetailedincludingguidanceonhowtocomplywiththerequirementson:
• whattypesoffeesandchargestodiscloseincludingthoseproductsthatarenotsecurities;
• howfeesandchargesshouldbedisclosed,includinganyimpactofthetransactionthatdoesnotmeetthedefinitionofafeeorcharge(e.g.withholdingtaxesorothertaximplications);and
• howevidenceofdisclosureistobemaintained.
CRM2– RegulatoryUpdates
• IIROCCRM2FAQUpdate– willtacklethird-partycompensation,inparticulardisclosureofnewissuecommissionandreferralfees• DelayedduetodiscussionswithCSA,expectedinMay,2016
CRM2– RegulatoryUpdates
• 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
What’sNextinCanada– CRM3,4?
• ProposedRegulatoryBestInterestStandardFramework:– Potentialguidanceasprovidedintheproposal.– InthecontextofCanadiansecuritieslegislation,abestintereststandardwouldbeformulatedasaregulatoryconductstandardandnotasarestatementorformulationofafiduciaryduty.
• Businessandregulatorycostsformarketparticipantsshouldbeproportionatetothesignificanceoftheregulatoryobjectivessoughttoberealized. Queryanticipatedimpact?
What’sNextinCanada– CRM3,4?
• InDecember,2015,MFDAissuedBulletin#0671– ConsultationonCostReportingforInvestmentFunds:– Proposesdisclosureofcostsofowninginvestmentfunds(orotherproducts)thatarenotpaidtothedealer,suchasmanagementfees,fundoperatingcosts,redemptionfeesandshorttermtradingfees.
– IIACcommentedonimplicationsoftheproposalforexpandedproductcostreporting;commentsarebeingsharedwiththeCSA.
What’sNextinCanada– CRM3,4?
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).
Current Global Regulatory Landscape – U.S.
� 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).
Current Global Regulatory Landscape – U.S.
� 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?
Current Global Regulatory Landscape – U.S.
� 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)
Current Global Regulatory Landscape – U.S.
� 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.
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