The Client Relationship Model Phase 3 (CRM3), also known as Total Cost Reporting (TCR), is arguably the most significant regulatory change in the Canadian investment industry since the introduction of CRM2 a decade ago. While CRM2 forced advisors to show only commissions and trailer fees, CRM3 mandates financial institutions to disclose all costs associated with mutual funds, Exchange Traded Funds (ETFs) and segregated funds. These fees include Management Expense Ratios (MERs), trailing commissions, and trading expenses. The goal of CRM3 is to enhance transparency to clients by providing a clear and easy to understand breakdown of the total costs they pay for investments, and empower stakeholders to better understand how fees affect returns of these products. By improving clarity, the expectation is improved confidence between the financial institutions and their customers by explicitly informing them what they are paying for and how much they are paying. This applies to investments held in registered accounts such as the Registered Disability Savings Plan (RDSP).
Financial statements from an investment institution normally highlight net returns, and omit (arguably intentionally) any fees associated with those products. Starting in 2027, annual reports should include the total Fund Expense Ratio (FER), which is a percentage that combines MER and Trading Expense Ratio (TER). FER will include all operating expenses that directly reduce the net return of the fund and allow investors to see the exact impact of annual fees in dollar amounts.
The move toward broad based globally diversified low-fee index funds or ETFs is likely to accelerate because of CRM3. For many Canadians, seeing these hidden fees as an actual dollar amount for the first time is expected to be a catalyst for switching to lower cost options. Similarly, there will be increased scrutiny of the actual value delivered of high fee products such as mutual funds and segregated funds.
How will this affect an RDSP?
For those managing accounts like the RDSP where compounding is vital for the long term security of the beneficiary, CRM3 transparency can help ensure that more money stays inside the account rather than being lost to high hidden fees. Account holders and/or beneficiaries are advised to review annual statements and evaluate lower cost alternatives if the fees are excessive or if investments fail to meet certain benchmarks.