See How CRM2 Will Affect You
Depending on where you sit, CRM2 can seem terrifying. Because of this regulation change, the books are being opened and advisors are required to go into much greater detail when it comes to their fees, giving investors more information to sort and analyze in terms of the services being rendered. Whether or not you consider the move a wise one, there are five questions that need to be addressed.
Do people need this new transparency system?
According to a survey done by the Canadian Securities Administrators (CSA), two-thirds of investors did not know about the compensation advisors receive from mutual fund companies. Although an argument can be made for the positive aspects of ignorance, investors have a right to know where their money is going. Full disclosure is a necessary part of the business world and excluding the investment field from this concept is not right.
How will this newly gained knowledge affect them?
That being said, the sudden realization of how the money flows has the potential to cause investors to abandon the field of mutual funds. In order to prevent (or limit) this mass migration advisors need to be ready to explain the compensation situation to their clients.
How should fees be explained?
Advisors should always make sure investors know the full range of services they are getting when the advisor is brought on board. Introduce an itemized list of services that clearly lays out where the money is going and the value that comes from an advisor’s services. The hostility that can come from the new knowledge of how the money is divided is lessened when the details are known up front and the full value of those fees is laid out for the investor.
What does this mean for mutual funds?
One likely option in the post-CRM2 investment world is an increase in ETFs, as the new knowledge regarding the fee system will cause investors to stay away from mutual funds. This is good news for businesses that specialize in ETFs and great news for innovative companies that specialize in ETFs.
WisdomTree is one such company that will see an increase in investor interest. One of the largest ETF providers, Wisdomtree has in fact used smart engineering to recreate the process of investing. Their unique “smart beta” products will be of great interest to investors who now know where their money is actually going.
What does CRM2 mean for robo advisors?
Robo advisors are the most likely winners in the new CRM2 market. With low fees already in place the reveal of their added costs won’t be as startling to current users while disgruntled investors choosing to explore their options are likely to be swayed over by the lower costs. Add in the additional benefits of the robo advisor system (increased access, easy-to-use platform systems) and the robo advisor system is going to come across as the best option for the financially-savvy consumer. Startups like Wealthsimple and Nest Wealth can use the new market rules to stress why their system is best for the modern investor.
CRM2 is bringing the investment market into its next stage. If handled properly, this evolution of the market will result in more content investors who feel fully knowledgeable about their investments. This new stage is also great news for FinTech, as the increased disclosure element of the new regulatory system shows that FinTech is the best option for the smart investor.