If you are a casual reader of Canadian financial stuff you might have recently heard about this thing called CRM2. It’s being billed as a big win for the little guy and some folks are talking about how it will, “clean up the industry, make things transparent, and lead to a financial product revolution”.
I am not so optimistic. There is so much money involved in keeping people in the dark about financial advising and so much misinformation out there that I’m not sure CRM2 will make much of a difference one way or the other. But we’re getting ahead of ourselves a bit here, I still haven’t even told you what this random Star Wars-character-of-a-financial-acronym means yet, nor have we outlined the problems it’s purported to be the solution to.
To understand why I have such a negative view of the financial industry check out my boy John Oliver explaining how screwed up the incentives are for investment advisors and why the industry as a whole is so rotten. I should note that while Oliver is referring to the USA market, the same principles and specifically the “fiduciary vs financial adviser” problem is the same in Canada – except possibly worse since our mutual fund fees are considerably higher than those of the USA.
The Value of Financial Advice
The amount of pushback this sort of common sense revelation gets from the massive financial services industry is really something to behold. I’ve written several times on this site about the fact that good financial advice is definitely worth something. The problem is that you can’t have a fair, competitive, transparent market when everyone is uneducated about the product, (due to our collective refusal to address financial illiteracy in our education systems) and has no idea how they are paying for it. Check out this article for more details.
CRM2 (whatever it is) does take some steps toward shedding light on this on this compensation issue. What it doesn’t do is fix the problems that Oliver outlines. It DOESN’T:
• Explain the drastic difference in the terms “fiduciary” and “financial adviser/advisor”.
• How much your “financial advice person” (there are so many ridiculous industry terms for what this individual might be called, let’s just go with this generic title) is getting paid. (It does tell you what you are paying to the firm that the person works for.
• You will not find out what your investments (almost always Canada’s mutual funds – which are objectively the worst in the entire world) cost.
• Force anyone to explain that roughly 98% of Canada’s mutual funds range from poor to horrifically poor and that basic index ETFs/couch potato investing is a much better solution for their RRSPs and TFSAs.
So if CRM2 doesn’t help you identify if someone actually has your financial interest at heart (or more accurately: legally has to place your financial interests ahead of their commission-based sales incentives), and it isn’t really doesn’t help clear up exactly what you’re paying for, why are we bothering with it?
CRM2 In a Nutshell
CRM2 stands for Client Relationship Model. As you might have guessed, this is the second set of reforms, hence the number. It seeks to make it more difficult for financial advice people to rip off everyday Canadians who really have little-to-no idea what they are invested in and how they are paying for the services provided. What it actually does is force investment firms to write down the investment fees you are paying in dollar terms (instead of a percentage) as their client. CRM2 has been in the news lately because an important date in regards to the rules changes has just come up, but what you really need to know is that you’ll see the changes of 2017 (get ready for a massive flood of mutual fund sales before that date).
I could do a poor job summarizing the nuts and bolts of the rule changes, or I could just tell you to view this excellent article by the Globe and Mail’s Rob Carrick.
At the end of the day I continue to sound like a broken record by stating:
Here is what you really need to think about when it comes to paying for financial advice:
• What do you know about how your money is managed?
• What do you NOT know about your overall financial picture? Are you fully aware of what you don’t know?
• Is it worth a bit of reading to pinpoint exactly what you need help with and how you should get advice about it?
• Do you know whether your advisor has a fiduciary obligation to you or not?
• Has your advisor ever told you exactly how they are getting paid?
• If they don’t have a fiduciary obligation to you OR they have never discussed their pay structure you need to promptly fire them and get better advice no matter how nice they are!
• Have you looked into fee-only financial advising options such as those discussed in this article?
• Have you read our free eBook about the low maintenance “couch potato investing” approach that we use for our own retirement savings?
• Are you aware of the new robo advisor services that represent a much different (cheaper) financial advice model in Canada? If not, check out our Ultimate Guide to Canada’s Robo Advisors.