Canadian Buy Side Braces for CRM2

Terry Flanagan

In Canada, the Client Relationship Model Phase 2 (CRM2) amendments to National Instrument 31-103 will require mutual funds and ETF providers to disclose both their management expense ratio and trade expense ratios.

“The end investor will be able to see very clearly that the investment advisor is being paid 1% of assets every year, as long as they hold the fund, or whatever the number happens to be,” Doug Clark, managing director at Investment Technology Group, told Markets Media. “That’s going to either drive investors into more ETF products or it’s going to force the advisor community into more of a flat fee model, and may facilitate the growth of ‘robo-advisors’.”

Trade expense ratio is the commissions paid for trading divided by assets under management. “I don’t think anybody’s going to run their fund just to have the best TER, like nobody runs their fund to have the best MER [management expense ratio]. But you want to make sure you’re not in the bottom quartile,” said Clark. “So you’re going to have some funds looking at more facilitation trading, where when they do a prop bid with a facilitation desk, have the desk put the commission into the spread, rather than charged as an explicit commission.”

This will affect trading protocols, most funds with very high turnover will manage that down. “If nothing else, that puts a little pressure on fund turnover, and should impact stock velocity and trading volumes in a less positive way,” Clark said.

FundSERV, a provider of a network for the Canadian investment industry through which manufacturers gain access to distributors and distributors gain access to investment products, is upgrading its network to support the investment industry’s implementation CRM2. The upgrade will enable fund managers to report trailer fees and commissions at the investor account level and provide distributors with the necessary details to meet CRM2 requirements.

“We began incorporating CRM2 functionality last fall as part of a much larger systems upgrade, which also completed our conversion from flat files to the XML file format,’ said Robert Smuk, president and CEO of FundSERV, in a statement. “XML is widely used in financial services and gives the industry the flexibility to adapt more readily to major regulatory changes.”

CRM2 will also require full disclosure of commissions costs to clients. For example, if a retail client buys a bond from a discount broker, and the discount broker purchases the bond from a wholesaler at 103 and sells it to the client at 102, the discount broker will need to mark the transaction showing the $1 spread as commission.

“Suddenly you are going to see one of the most profitable portions of the discount brokerage world become very transparent,” Clark said. “We think that will change, significantly, the behaviors around discount fixed income trading and will likely result in either a massive reduction in those spreads or a move by retail clients into ETF products. You could see a real push on the fixed income market that is largely subsidized by retail flow having to figure out how to live in a world where the disparity in costs of trading pure fixed income versus trading exchange-traded products becomes very well known.”

Featured image via tashatuvango/Dollar Photo Club

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