At Steadyhand we aim to improve the investing landscape for Canadians. Establishing our firm in 2007 with the principles of stewardship, candor and transparency was our biggest step towards pursuing this goal, and from time to time, we will further the cause by expressing our views on industry practices and standards. We hope this will stimulate dialogue amongst investors, investment professionals and regulators.

by Tom Bradley

The wealth management industry is nearing the CRM2 finish line. New client reporting regulations kicked in this year and most Canadian investors have received reports that tell them how much they’re paying their dealer or investment manager, and what their returns have been.

Preparing for CRM2 was a huge deal for the industry. Arguably, it was a bigger challenge than Y2K. Significant system changes were required and most firms put their advisors and branch managers through extensive training. They were coached, and in some cases scripted, on how to talk to clients about fees and returns.

As an early and noisy supporter of better reporting, I’ve been watching the CRM2 rollout with interest. I’ve looked at a couple dozen reports and talked to many investors. There’s no way around it, I’m feeling let down. The regulators were forced to take the lead on this issue (like other client-friendly initiatives) and when it was the wealth managers’ turn at the plate, they whiffed.

In most cases, investment companies (some owned by highly profitable institutions) did the minimum required. They provided returns for 2016 only, which is of limited use, and are showing fees using the prescribed form. Instead of enhancing and deepening their client relationships, they’ve caused more confusion and mistrust. (Note: There are a handful of firms that have embraced CRM2 and significantly upgraded their reporting.)

My partners tell me I need to temper my expectations and accept that CRM2 is a good first step, but I can’t help but feel industry executives failed to grasp the opportunity. Grumbling about overzealous regulators and unreasonable deadlines obscured the many positive aspects of CRM2.

There are some firms that have always done a good job. Our firm has been reporting returns and total fees to clients on a quarterly basis for ten years now and have seen the good side of CRM2. Here’s what too many Canadian wealth managers are missing.

“I know exactly where I stand.” (actual comment from a client)

Investors have a lot to worry about, but what they’re paying and how they’re doing shouldn’t be two of them. Our clients aren’t immune to the vagaries of the markets, but they’ve moved past worrying about the investing basics. They’re not surprised by fees and returns, and don’t feel like they’ve been misled or tricked.

The irony of the industry’s reporting subterfuge is that firms like ours win clients who actually did quite well at their previous firm and paid a reasonable fee. They jumped ship because they didn’t know that and got tired of guessing. They didn’t know if they should trust their advisor.

“You mean I don’t need to build my own spreadsheets anymore?”

Client reporting is a necessary ingredient for developing an adequate level of investing knowledge. Industry officials and legislators can talk all they want about education, but if providers don’t close the feedback loop between what’s promised and what’s delivered, investors can’t be expected to be financially literate.

Having completed the loop, we get clients asking better questions. Whether they’re happy or unhappy, it’s for the right reasons. The smiles come from good long-term returns. The hard questions are about the appropriateness of their asset mix, a fund that hasn’t performed or why we changed a manager.

“Honey, this is what I’ve been looking for.”

We’ve found that when our clients regularly see their historical returns, it’s easier to talk about weak or negative periods. Clients can see the power of compounding in action and are able to put the latest quarter, or even year, in context.

In the years after the 2008 crisis, clients were so beat up by the constant flow of negative news, that they were often surprised by how much money they’d made, irrespective of how we were doing at the time.

With a better understanding of where they stand, our clients’ behavior has been outstanding. There’s been no slippage between how our funds have done and our client returns. Our clients don’t trade too much or make knee-jerk decisions. Indeed, when markets are weak, they’re more inclined to buy than sell.

“For God’s sake, why doesn’t everybody do this?”

Reporting back to clients in a clear, concise way shouldn’t be a business differentiator. But it will continue to be for the firms that are, until the rest of the rest get their act together.