Description
Client Relationship Model Phase 2 - Ernst & Young
Client Relationship
Model Phase 2
Beyond the requirements
to a strategic approach
2 | Client Relationship Model Phase 2
Greater transparency
than ever
With the recent regulatory development
by the Canadian Securities Administrators
(CSA), ?scal year 2015 is expecLed Lo
be demanding from a cost and resource
perspective as companies now face added
pressure to disclose more information
than ever to investors.
1he ClienL RelaLionship Model Phase 2
(CRM2) presenLs a wide·ranqinq series
of reforms aimed at providing investors
with transparency around the cost and
value ol advice lrom ?nancial advisors.
ln addiLion Lo chanqes Lo clienLs' ?nancial
statements, these measures will have
lonq·Lerm sLraLeqic implicaLions
for businesses.
When considering an approach to
compliance wiLh CRM2, iL's imporLanL Lo
look beyond the regulatory mechanics
and anticipate the overall impact on the
clienL·advisor experience. ll you're lookinq
Lo seize Lhe opporLuniLy Lo re·examine
Lhe way you provide ?nancial advice Lo
your clients, it may be wise to consider
a proactive approach to the changes
CRM2 brinqs. 1o achieve Lhis, a dedicaLed
change management strategy will be
key in mitigating compliance and
reputational risks.
Strategic business
implications
1he requiremenLs ol CRM2 will be
phased in beLween 201^ and 2016.
Fiqure 1 illusLraLes Lhese requiremenLs
through three different lenses: a) where
the bulk of the impact will be felt (i.e.,
Lhe lronL or back ol?ce), b) wheLher Lhe
requirement will have a more strategic or
tactical impact and c) the magnitude of
the impact.
As can be seen in Lhe exhibiL, as we move
closer Lo 2016 Lhe impacL ol compliance
wiLh CRM2 requiremenLs will be lelL
most keenly by the advisor, and will be
primarily strategic in nature.
Advisor/client-facing
Compliance, operations, technology
Tactical
(transactional,
point of sale)
Strategic
(long-term,
relationship)
Minor impact
Moderate impact
Major impact
2014: Pre-trade
disclosure
(oral or written)
2014: General
statement on
benchmarks
2016: Additional
information on
Lrade con?rmaLions
2016: Fund
managers –
provide trailing
commissions
2015: Position cost and Deferred Sales
Charge (DSC) funds on statement
2015: Off-book
account statements
2016: Performance
reporting
2016: Report
of charges and
other compensation
2015: Fund
managers –
orphan accounts
2014: Trade
con?rmaLions on
debt securities
Figure 1
3 Client Relationship Model Phase 2 |
Impact on the client/
advisor experience
CRM2 will have lar·reachinq ellecLs on
Lhe clienL·advisor relaLionship. lnvesLors
will have access to more information than
ever before, including:
· How the wealth management provider
is being compensated, both directly
by the investor and indirectly by
product providers
· How much, in dollar terms, is being
paid by the client, both directly and
indirecLly, Lo Lhe ?rm lor each accounL
· The investors’ individual rate of return
earned by the investments in each
account
In light of the new transparency
requiremenLs under CRM2, you
need to be prepared with a proactive
communication plan that will help your
clienL·servinq Leams deliver consisLenL
messaging to prepare clients for the
new information. You’ll also need to be
equipped with the tools to respond to
client inquiries. Being prepared will help
strengthen the trust between you and
your clients.
Some scenarios to consider:
· Requirements may reveal previously
undisclosed inlormaLion in exisLinq
relationships.
· Perception will be reality — if a client
does not believe full compensation was
disclosed, poinLinq Lo Lhe "?ne prinL"
won’t help.
· Client statements will look very
dillerenL by 2016; advisors and
assisLanLs musL be prepared Lo explain
the content.
· Advisors will need resources to help
them and their assistants clearly
explain Lhe new inlormaLion Lo clienLs
(e.q., how Lo explain advisor vs. ?rm
compensation).
By being proactive, you can reduce
your risk around CRM2. Planninq well in
advance can help you provide support for
your advisors around the conversations
that will need to take place.
Increased
transparency
for investors
CRM2 clienL reporLinq requiremenLs will
increase transparency and consistency
around compensation, valuation and
invesLmenL perlormance. Fiqure 2
provides a snapshot of what will
become more transparent for investors
in the future.
Today Future
Disclosure of charges and compensation
· Direct charges only
· Period incurred
· Direct and indirect charges and
compensation
· Annual summarized reporting
Valuation and holdings reporting changes
· Firm discretion on valuation of illiquid securities
· No holdinqs speci?cally called ouL by
compensation arrangement
· Prescribed valuation calculations
· DSC call·ouL
· Original or book cost must be included
Performance reporting
· Firm discretion · Prescribed methodology and time periods
Figure 2
4 | Client Relationship Model Phase 2
Today’s client statement
M5C 2X2
416.555.1111
416.555.2222
Anticipating a different client statement
1oday's clienL sLaLemenL leaves much Lo Lhe discreLion ol Lhe ?nancial advisor in Lerms
ol disclosure ol cosLs and perlormance. ln 2016, Lhe clienL reporLinq requiremenLs will
be much more prescripLive under Lhe CRM2 rules.
Fiqure 3 shows Lhe siqni?canL chanqes movinq lrom Loday's clienL sLaLemenL Lo Lhe
client statement of the future.
Figure 3
1.
2.
3.
Disclosure of charges and compensation
Today:
· Fees paid direcLly are included in Lhe sLaLemenL
period they are incurred, but an annual report of
charges is not required.
· CompensaLion received indirecLly by Lhe ?rm and/or
advisor (e.g., trailer commissions) is not disclosed.
Disclosure of cost, investments subject to
DSC and market value determination
Today:
· Oriqinal or book cosL ol invesLmenLs is commonly
included on statements but is not required.
· DSC lunds are noL Lypically idenLi?ed on sLaLemenLs
unless included in the fund description.
· Firms have Lheir own pricinq meLhodoloqy lor
illiquid securiLies which lows Lhrouqh Lo clienL
statements.
Prescribed performance reporting
Today:
· AlLhouqh noL a requiremenL, some advisors and
?rms provide hiqher·value clienLs wiLh Lime·
weighted performance reporting.
· Firms have lull conLrol over Lhe Lime periods,
calculation methodology and account aggregation
they choose to use.
5 Client Relationship Model Phase 2 |
M5C 2X2
416.555.1111
416.555.2222
Disclosure of cost, investments subject to
DSC and market value determination
End statement:
· All sLaLemenLs are required Lo include oriqinal or
book cost of investments.
· DSC lunds are required Lo be separaLely idenLi?ed
on statements.
· A prescribed meLhodoloqy is needed lor
determining market value to improve pricing and
performance reporting consistency across industry.
1.
2.
3.
Statement of the future
Prescribed performance reporting
End statement:
· Firms are required Lo provide an annual perlormance
report for each account.
· Perlormance musL be calculaLed usinq a money·
weighted rate of return formula and include current,
3, 5 and 10·year periods, and since incepLion.
· AddiLional requiremenLs include showinq, in dollar
terms, the change in account value for the current
year, and since inception.
· Chanqe in accounL value is required Lo be broken
down between contributions and withdrawals and
market appreciation and depreciation.
Disclosure of charges and compensation
End statement:
· All dealer lees and compensaLion, embedded or
directly charged, are required to be disclosed in an
annual report.
· Firms are able Lo choose how Lhey break ouL lees
(e.g., paid directly or received as compensation)
and how Lhey explain advisor versus dealer
compensation.
6 | Client Relationship Model Phase 2
How will this affect the nature of advice?
More Lhan ever belore, ?nancial advisors will be called on Lo demonsLraLe Lheir value Lo
investors. A structured and disciplined advice approach that is not solely dependent on
invesLmenL perlormance will become more criLical once CRM2 is lully implemenLed. 1his
presenLs an opporLuniLy lor ?rms Lo review Lheir advice models.
CRM2 will impacL ?rms across all sLaqes ol Lhe advice process, as can be seen in Fiqure ^.
Figure 4
1. Discovery: Review and understand
client goals, needs and fnancial picture
· 1he ?nancial planninq discussion
process used to demonstrate value and
personalization will likely become more
Lime·consuminq and cosLly.
· Advisors will need to hone in on client
needs and goals rather than employ a
"producL·cenLric" discovery process.
· With more transparency into costs,
advisors need to assess a client’s
willingness to pay for advice.
· Implication: Firms need to create a
standardized approach to increase
el?ciency and reduce cosL ol discovery.
2. Plan: Prioritize goals, align with risk
tolerance and identify required advice
· CRM2 will beqin Lhe process ol separaLinq Lhe
cost of advice from other services.
· ConcepL ol "scaled advice" will become more
commonplace as advisors adapL producLs/
services offered based on their assessment of
Lhe clienL's needs, complexiLy, asseL level and
overall willinqness/abiliLy Lo pay lor advice.
· Implication: Firms need Lo develop el?cienL
business rules to streamline their advisors’
decision·makinq process, enablinq Lhem Lo
quickly oller modular ?nancial planninq Lailored
Lo clienLs' needs and poLenLial lee pro?le.
5. Monitor: Account surveillance and
client reporting
· CRM2 provides a heiqhLened level ol
transparency around ongoing costs and
performance.
· Advisors will be expecLed Lo explain and
sometimes justify account performance
and demonstrate the value their clients
receive relative to the reported costs.
· Implication: Firms need to consistently
deliver proactive communication to “get
in lronL ol Lhe numbers".
3. Advise: Select investments and
other specialized products and services
· More pressure to offer seamless service
across traditional silos to support advice
value proposiLion (?nancial planninq, crediL
products, mortgages, insurance, small
business services, etc.).
· Likely more transparency demanded by
clienLs · "show me whaL you're doinq".
· Implication: Firms need to align their
service and revenue models with a focus on
deliverinq an inLeqraLed clienL experience
regardless of customer touchpoint.
4. Implement: Execute plan through
onboarding and asset transfer
· WiLh CRM2 makinq iL easier Lo compare
"apples Lo apples" lrom a perlormance and
cost perspective, the onboarding and account
servicinq experience will be a key dillerenLiaLor.
· Implication: Firms musL deliver a "hassle·
lree" and el?cienL onboardinq experience
that eliminates duplication and reduces client
requirements, all while keeping clients aware of
the progress.
CRM2’s effects
on the
advice model
Important questions to consider:
· Do our advisors consistently articulate and deliver
on the client value promise?
· What step(s) in our advice process do clients perceive
to be of greatest value?
· What percentage of clients have a documented plan?
Are these plans used to track progress against goals?
· Are we truly providing integrated wealth management
advice to clients?
· Can we afford to continue to deliver the same level of
advice to all customer segments?
· How do our advisors currently disclose the cost of advice
and related dealer compensation to clients?
· How does our current reporting align with client
expecLaLions?
7 Client Relationship Model Phase 2 |
Impacts on asset managers
AL ?rsL blush, Lhe CRM2 chanqes impose relaLively modesL requiremenLs on asseL
manaqers. Chanqes Lo Lhe way inlormaLion is provided Lo dealer ?rms and chanqes Lo
clienL sLaLemenLs in Lhe case ol "orphan" accounLs make Lhe overall burden ol sLricL
compliance to the requirements quite manageable. However, the true impact for asset
manaqemenL ?rms is on Lheir disLribuLion channels.
Asset managers with captive distribution arms need to make sure their advisors are
getting the training and communication support necessary to satisfy their clients and
alleviate concerns.
Asset managers reliant on independent advisors need to ensure they support their key
disLribuLors and provide plain·lanquaqe raLionale Lo supporL Lhe Lrailinq commissions
LhaL will be disclosed Lo invesLors. 1he indusLry has already sLarLed Lo see siqni?canL
resources spenL on CRM2 supporL lor independenL advisors, as lund manaqers Lry and
gain competitive advantage.
For investment fund managers, investing the time up front to assess the strategic
implicaLions ol CRM2 reduces Lhe risk ol losinq asseLs Lo compeLiLors. Fiqure 5 ouLlines
some key strategic considerations and impacts to asset managers.
Captive distribution Independent distribution
Provide proper training for those in
clienL·lacinq roles
Cannot rely on favorable trailer commissions
Lo quaranLee "shell space"
Communicate proactively and transparently
around fees and performance
Performance back in the spotlight
Make sure advisors and assistants are
supplied with common messaging
Need to support key distributors with
communication, training and resources
Address issue ol "advisors" vs. "sales lorce" Clearly provide value proposition around
perlormance·Lo·cosL raLio
Figure 5
Business strategy Customer strategy Product strategy People and
organization change
· Work closely with top
distribution partners and
vendors Lo prepare lor CRM2
· For asset managers with
a proprietary sales force,
establish an integrated
(manufacturing and
disLribuLion) CRM2 proqram
· Model impacL ol CRM2 on
investor switching behaviour
(e.g. to substitute products such
as ETFs, GICs, etc.)
· Analyze cost of providing
performance reporting to
orphaned (no advisor) client
name accounts
· Review advisor segmentation to
idenLily "aL risk" asseLs
· Provide dedicaLed CRM2
support to advisors with the
qreaLesL "aL risk" asseLs
· Review competitiveness (e.g.,
pricing, marketing support,
etc.) of F class, premium series
and porLlolio/wrap producLs
in light of potential increasing
demand
· Continue to innovate or evolve
investment solutions to clearly
articulate and distinguish
beLween advice (e.q., ?nancial
advisor) and portfolio
management (e.g., investment
fund manager)
· Develop a communication and
training strategy for wholesalers
and contact centre staff
· Anticipate increased demand
for practice management
support
A
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t
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o
n
s
t
o
c
o
n
s
i
d
e
r
I
l
l
u
s
t
r
a
t
i
v
e
i
m
p
a
c
t
8 | Client Relationship Model Phase 2
Implementing CRM2
LY's CRM2 lramework balances operaLinq model impacLs and sLraLeqic quesLions.
Figure 6
Strategic implications and opportunities
Business architecture implications
Business strategy Customer strategy Product strategy People and
organizational change
· Strategy and business model
· Business line ?nancials
· Segmentation and service model
· Client response and behavior
· Product and platform
lexibiliLy
· Product innovation
· Change management
· Organizational and resourcing
Dealers
· Enhanced cost disclosure
· AccounL/addiLional sLaLemenL
· CosL/perlormance reporLinq
Investment fund managers
· AccounL/addiLional sLaLemenL
· Duty to provide information
to dealers
Front and middle offce Back offce
Product Relationship management Client onboarding Investing Servicing Practice development Management and administrative
Data
Technology
CRM2
9 Client Relationship Model Phase 2 |
Reducing risks on implementation
lnvesLinq Lime up lronL Lo assess sLraLeqic implicaLions reduces boLh implemenLaLion and lonq·Lerm business risk.
Figure 7
Business strategy Customer strategy Product strategy People and
organization change
· Analyze revenue at risk under
different scenarios
· Model Lhe impacL ol exiLinq
oll·book business
· Lxplore alLernaLive sources ol
revenue (e.g., product shelf fees)
· Research likely reaction of
clients and advisors to taking the
"sLraLeqic approach" (see below)
· Educate clients on the value
of advice through relevant
channels of communication
· Analyze cost of service impact
for client segments and
deLermine new home ol besL ?L
· Design a consistent client
experience (lace Lo lace, online,
paper) across business lines
· RevisiL lee·based pricinq/lee
schedules to support increased
demand
· Consider new offerings for
client portfolios that consist
primarily of trail products
· Analyze aliqnmenL ol Lhe ?rm's
performance reporting with
Lhird·parLy reporLinq
· Engage advisors in design of new
reporLs · Lhey will need Lo explain
them to clients
· Anticipate increased demand for
?nancial planninq supporL
· Anticipate increased demand for
practice management support
· Create a change management
program to support advisors
LhrouqhouL Lhe Lhree·year
journey
A
c
t
i
o
n
s
t
o
c
o
n
s
i
d
e
r
While requiremenLs are prescripLive, you have some discreLion on how Lo comply. You can Lake a lonq·Lerm sLraLeqic approach
or opL lor a cosL·ellecLive LacLical response Lo Lhe requiremenLs · or any deqree in beLween. Reqardless ol Lhe selecLed
approach, a proacLive communicaLions sLraLeqy is essenLial Lo explain Lhe decisions made.
CRM2
requirements
2014
2016
2015
Strategic approach
Tactical approach
Regardless of selected approach, a proactive
communications strategy is essential
• “Spirit of the law” approach to compliance
• Requirements are seen as an opportunity to evolve the way in which the frm offers advice
• Long-term in nature
• Could involve signifcant investment in systems
• Could require changes to operating model
• “Letter of the law” approach to compliance
• Desire to comply with minimal disruption to existing operating model
• Focus on fnancial impact of compliance
• System impact kept to a minimum
In speaking with leading wealth
management providers in Canada,
we’ve made several observations as
frms continue their preparations to
comply with CRM2:
• Some frms are conducting customer focus groups
to inform decision-making.
• Misinformation in the feld still appears prevalent
across the industry.
• Dedicated change management will be key to
mitigating compliance and reputation risks.
• There are challenges implementing an enterprise-
wide approach vs. tailoring the implementation to
the unique priorities of each line of business.
• Finding the resources to adopt a strategic approach
is challenging given competing priorities, both
regulatory and otherwise.
11 Client Relationship Model Phase 2 |
We can help
1he condensed Limelines around Lhe CRM2 implemenLaLion are provinq Lo be a challenqe
Lo many ?rms as Lhey come Lo recoqnize Lhe maqniLude ol ellorL required beLween now
and July 2016. We can help acceleraLe your implemenLaLion wiLh a disciplined rapid
assessmenL approach and experienced resources who will brinq LoqeLher Lhe Lechnical,
business and operational considerations, whether you opt for a more strategic or tactical
approach to the implementation.
Our Leam ollers experience in such areas as:
· FuLure proo?nq Lhe clienL experience
· Program management
· AnalyLics: clienL and advisor pro?LabiliLy, cosL impacL, pricinq
· Implementation support: gap analysis, requirements, testing
· Compliance process/LesLinq sLraLeqy
· People and organizational change
Contact us
Our Canadian ?nancial services advisory pracLice brinqs many years ol
indusLry and advisory experience Lo help you naviqaLe Loday's challenqinq
wealth management landscape.
With broad capabilities across areas such as client segmentation, platform
harmonization, regulatory reform, target operating models and distribution, we can help
your ?rm Lhrouqh complex, LranslormaLional proqrams or LacLical prioriLy iniLiaLives.
Please conLacL us Lo discuss how we can supporL your orqanizaLion's CRM2 proqram.
Paul Battista
Financial Services
Advisory Leader
+1 ^16 9^3 3820
[email protected]
Gregory Smith
Wealth Management
Advisory Leader
+1 ^16 9^3 ^593
[email protected]
Jacqueline Miller
Financial Services Risk
Management Advisory
+1 ^16 9^3 3^99
[email protected]
David Hurd
Wealth Management
Advisory
+1 ^16 9^3 ^^29
[email protected]
Dave Inglis
Wealth Management
Advisory
+1 ^16 9^3 3831
[email protected]
Colin Bradley
Wealth Management
Advisory
+1 ^16 9^3 5^68
[email protected]
EY | Assurance | Tax | Transactions | Advisory
About EY
LY is a qlobal leader in assurance, Lax, LransacLion and advisory services.
The insights and quality services we deliver help build trust and confidence
in the capital markets and in economies the world over. We develop
outstanding leaders who team to deliver on our promises to all of our
stakeholders. In so doing, we play a critical role in building a better working
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EY refers to the global organization, and may refer to one or more, of the
member firms of Ernst & Young Global Limited, each of which is a separate
legal entity. Ernst & Young Global Limited, a UK company limited by
guarantee, does not provide services to clients.
For more inlormaLion abouL our orqanizaLion, please visiL ey.com/ca.
© 201^ LrnsL & Younq LLP. All RiqhLs Reserved.
A member firm of Ernst & Young Global Limited.
LYC no. LH0208
12988^1
ED None
This publication contains information in summary form, current as of the date of publication, and
is intended for general guidance only. It should not be regarded as comprehensive or a substitute
for professional advice. Before taking any particular course of action, contact Ernst & Young or
anoLher prolessional advisor Lo discuss Lhese maLLers in Lhe conLexL ol your parLicular circumsLances.
We accept no responsibility for any loss or damage occasioned by your reliance on information
contained in this publication.
ey.com/ca
doc_954161506.pdf
Client Relationship Model Phase 2 - Ernst & Young
Client Relationship
Model Phase 2
Beyond the requirements
to a strategic approach
2 | Client Relationship Model Phase 2
Greater transparency
than ever
With the recent regulatory development
by the Canadian Securities Administrators
(CSA), ?scal year 2015 is expecLed Lo
be demanding from a cost and resource
perspective as companies now face added
pressure to disclose more information
than ever to investors.
1he ClienL RelaLionship Model Phase 2
(CRM2) presenLs a wide·ranqinq series
of reforms aimed at providing investors
with transparency around the cost and
value ol advice lrom ?nancial advisors.
ln addiLion Lo chanqes Lo clienLs' ?nancial
statements, these measures will have
lonq·Lerm sLraLeqic implicaLions
for businesses.
When considering an approach to
compliance wiLh CRM2, iL's imporLanL Lo
look beyond the regulatory mechanics
and anticipate the overall impact on the
clienL·advisor experience. ll you're lookinq
Lo seize Lhe opporLuniLy Lo re·examine
Lhe way you provide ?nancial advice Lo
your clients, it may be wise to consider
a proactive approach to the changes
CRM2 brinqs. 1o achieve Lhis, a dedicaLed
change management strategy will be
key in mitigating compliance and
reputational risks.
Strategic business
implications
1he requiremenLs ol CRM2 will be
phased in beLween 201^ and 2016.
Fiqure 1 illusLraLes Lhese requiremenLs
through three different lenses: a) where
the bulk of the impact will be felt (i.e.,
Lhe lronL or back ol?ce), b) wheLher Lhe
requirement will have a more strategic or
tactical impact and c) the magnitude of
the impact.
As can be seen in Lhe exhibiL, as we move
closer Lo 2016 Lhe impacL ol compliance
wiLh CRM2 requiremenLs will be lelL
most keenly by the advisor, and will be
primarily strategic in nature.
Advisor/client-facing
Compliance, operations, technology
Tactical
(transactional,
point of sale)
Strategic
(long-term,
relationship)
Minor impact
Moderate impact
Major impact
2014: Pre-trade
disclosure
(oral or written)
2014: General
statement on
benchmarks
2016: Additional
information on
Lrade con?rmaLions
2016: Fund
managers –
provide trailing
commissions
2015: Position cost and Deferred Sales
Charge (DSC) funds on statement
2015: Off-book
account statements
2016: Performance
reporting
2016: Report
of charges and
other compensation
2015: Fund
managers –
orphan accounts
2014: Trade
con?rmaLions on
debt securities
Figure 1
3 Client Relationship Model Phase 2 |
Impact on the client/
advisor experience
CRM2 will have lar·reachinq ellecLs on
Lhe clienL·advisor relaLionship. lnvesLors
will have access to more information than
ever before, including:
· How the wealth management provider
is being compensated, both directly
by the investor and indirectly by
product providers
· How much, in dollar terms, is being
paid by the client, both directly and
indirecLly, Lo Lhe ?rm lor each accounL
· The investors’ individual rate of return
earned by the investments in each
account
In light of the new transparency
requiremenLs under CRM2, you
need to be prepared with a proactive
communication plan that will help your
clienL·servinq Leams deliver consisLenL
messaging to prepare clients for the
new information. You’ll also need to be
equipped with the tools to respond to
client inquiries. Being prepared will help
strengthen the trust between you and
your clients.
Some scenarios to consider:
· Requirements may reveal previously
undisclosed inlormaLion in exisLinq
relationships.
· Perception will be reality — if a client
does not believe full compensation was
disclosed, poinLinq Lo Lhe "?ne prinL"
won’t help.
· Client statements will look very
dillerenL by 2016; advisors and
assisLanLs musL be prepared Lo explain
the content.
· Advisors will need resources to help
them and their assistants clearly
explain Lhe new inlormaLion Lo clienLs
(e.q., how Lo explain advisor vs. ?rm
compensation).
By being proactive, you can reduce
your risk around CRM2. Planninq well in
advance can help you provide support for
your advisors around the conversations
that will need to take place.
Increased
transparency
for investors
CRM2 clienL reporLinq requiremenLs will
increase transparency and consistency
around compensation, valuation and
invesLmenL perlormance. Fiqure 2
provides a snapshot of what will
become more transparent for investors
in the future.
Today Future
Disclosure of charges and compensation
· Direct charges only
· Period incurred
· Direct and indirect charges and
compensation
· Annual summarized reporting
Valuation and holdings reporting changes
· Firm discretion on valuation of illiquid securities
· No holdinqs speci?cally called ouL by
compensation arrangement
· Prescribed valuation calculations
· DSC call·ouL
· Original or book cost must be included
Performance reporting
· Firm discretion · Prescribed methodology and time periods
Figure 2
4 | Client Relationship Model Phase 2
Today’s client statement
M5C 2X2
416.555.1111
416.555.2222
Anticipating a different client statement
1oday's clienL sLaLemenL leaves much Lo Lhe discreLion ol Lhe ?nancial advisor in Lerms
ol disclosure ol cosLs and perlormance. ln 2016, Lhe clienL reporLinq requiremenLs will
be much more prescripLive under Lhe CRM2 rules.
Fiqure 3 shows Lhe siqni?canL chanqes movinq lrom Loday's clienL sLaLemenL Lo Lhe
client statement of the future.
Figure 3
1.
2.
3.
Disclosure of charges and compensation
Today:
· Fees paid direcLly are included in Lhe sLaLemenL
period they are incurred, but an annual report of
charges is not required.
· CompensaLion received indirecLly by Lhe ?rm and/or
advisor (e.g., trailer commissions) is not disclosed.
Disclosure of cost, investments subject to
DSC and market value determination
Today:
· Oriqinal or book cosL ol invesLmenLs is commonly
included on statements but is not required.
· DSC lunds are noL Lypically idenLi?ed on sLaLemenLs
unless included in the fund description.
· Firms have Lheir own pricinq meLhodoloqy lor
illiquid securiLies which lows Lhrouqh Lo clienL
statements.
Prescribed performance reporting
Today:
· AlLhouqh noL a requiremenL, some advisors and
?rms provide hiqher·value clienLs wiLh Lime·
weighted performance reporting.
· Firms have lull conLrol over Lhe Lime periods,
calculation methodology and account aggregation
they choose to use.
5 Client Relationship Model Phase 2 |
M5C 2X2
416.555.1111
416.555.2222
Disclosure of cost, investments subject to
DSC and market value determination
End statement:
· All sLaLemenLs are required Lo include oriqinal or
book cost of investments.
· DSC lunds are required Lo be separaLely idenLi?ed
on statements.
· A prescribed meLhodoloqy is needed lor
determining market value to improve pricing and
performance reporting consistency across industry.
1.
2.
3.
Statement of the future
Prescribed performance reporting
End statement:
· Firms are required Lo provide an annual perlormance
report for each account.
· Perlormance musL be calculaLed usinq a money·
weighted rate of return formula and include current,
3, 5 and 10·year periods, and since incepLion.
· AddiLional requiremenLs include showinq, in dollar
terms, the change in account value for the current
year, and since inception.
· Chanqe in accounL value is required Lo be broken
down between contributions and withdrawals and
market appreciation and depreciation.
Disclosure of charges and compensation
End statement:
· All dealer lees and compensaLion, embedded or
directly charged, are required to be disclosed in an
annual report.
· Firms are able Lo choose how Lhey break ouL lees
(e.g., paid directly or received as compensation)
and how Lhey explain advisor versus dealer
compensation.
6 | Client Relationship Model Phase 2
How will this affect the nature of advice?
More Lhan ever belore, ?nancial advisors will be called on Lo demonsLraLe Lheir value Lo
investors. A structured and disciplined advice approach that is not solely dependent on
invesLmenL perlormance will become more criLical once CRM2 is lully implemenLed. 1his
presenLs an opporLuniLy lor ?rms Lo review Lheir advice models.
CRM2 will impacL ?rms across all sLaqes ol Lhe advice process, as can be seen in Fiqure ^.
Figure 4
1. Discovery: Review and understand
client goals, needs and fnancial picture
· 1he ?nancial planninq discussion
process used to demonstrate value and
personalization will likely become more
Lime·consuminq and cosLly.
· Advisors will need to hone in on client
needs and goals rather than employ a
"producL·cenLric" discovery process.
· With more transparency into costs,
advisors need to assess a client’s
willingness to pay for advice.
· Implication: Firms need to create a
standardized approach to increase
el?ciency and reduce cosL ol discovery.
2. Plan: Prioritize goals, align with risk
tolerance and identify required advice
· CRM2 will beqin Lhe process ol separaLinq Lhe
cost of advice from other services.
· ConcepL ol "scaled advice" will become more
commonplace as advisors adapL producLs/
services offered based on their assessment of
Lhe clienL's needs, complexiLy, asseL level and
overall willinqness/abiliLy Lo pay lor advice.
· Implication: Firms need Lo develop el?cienL
business rules to streamline their advisors’
decision·makinq process, enablinq Lhem Lo
quickly oller modular ?nancial planninq Lailored
Lo clienLs' needs and poLenLial lee pro?le.
5. Monitor: Account surveillance and
client reporting
· CRM2 provides a heiqhLened level ol
transparency around ongoing costs and
performance.
· Advisors will be expecLed Lo explain and
sometimes justify account performance
and demonstrate the value their clients
receive relative to the reported costs.
· Implication: Firms need to consistently
deliver proactive communication to “get
in lronL ol Lhe numbers".
3. Advise: Select investments and
other specialized products and services
· More pressure to offer seamless service
across traditional silos to support advice
value proposiLion (?nancial planninq, crediL
products, mortgages, insurance, small
business services, etc.).
· Likely more transparency demanded by
clienLs · "show me whaL you're doinq".
· Implication: Firms need to align their
service and revenue models with a focus on
deliverinq an inLeqraLed clienL experience
regardless of customer touchpoint.
4. Implement: Execute plan through
onboarding and asset transfer
· WiLh CRM2 makinq iL easier Lo compare
"apples Lo apples" lrom a perlormance and
cost perspective, the onboarding and account
servicinq experience will be a key dillerenLiaLor.
· Implication: Firms musL deliver a "hassle·
lree" and el?cienL onboardinq experience
that eliminates duplication and reduces client
requirements, all while keeping clients aware of
the progress.
CRM2’s effects
on the
advice model
Important questions to consider:
· Do our advisors consistently articulate and deliver
on the client value promise?
· What step(s) in our advice process do clients perceive
to be of greatest value?
· What percentage of clients have a documented plan?
Are these plans used to track progress against goals?
· Are we truly providing integrated wealth management
advice to clients?
· Can we afford to continue to deliver the same level of
advice to all customer segments?
· How do our advisors currently disclose the cost of advice
and related dealer compensation to clients?
· How does our current reporting align with client
expecLaLions?
7 Client Relationship Model Phase 2 |
Impacts on asset managers
AL ?rsL blush, Lhe CRM2 chanqes impose relaLively modesL requiremenLs on asseL
manaqers. Chanqes Lo Lhe way inlormaLion is provided Lo dealer ?rms and chanqes Lo
clienL sLaLemenLs in Lhe case ol "orphan" accounLs make Lhe overall burden ol sLricL
compliance to the requirements quite manageable. However, the true impact for asset
manaqemenL ?rms is on Lheir disLribuLion channels.
Asset managers with captive distribution arms need to make sure their advisors are
getting the training and communication support necessary to satisfy their clients and
alleviate concerns.
Asset managers reliant on independent advisors need to ensure they support their key
disLribuLors and provide plain·lanquaqe raLionale Lo supporL Lhe Lrailinq commissions
LhaL will be disclosed Lo invesLors. 1he indusLry has already sLarLed Lo see siqni?canL
resources spenL on CRM2 supporL lor independenL advisors, as lund manaqers Lry and
gain competitive advantage.
For investment fund managers, investing the time up front to assess the strategic
implicaLions ol CRM2 reduces Lhe risk ol losinq asseLs Lo compeLiLors. Fiqure 5 ouLlines
some key strategic considerations and impacts to asset managers.
Captive distribution Independent distribution
Provide proper training for those in
clienL·lacinq roles
Cannot rely on favorable trailer commissions
Lo quaranLee "shell space"
Communicate proactively and transparently
around fees and performance
Performance back in the spotlight
Make sure advisors and assistants are
supplied with common messaging
Need to support key distributors with
communication, training and resources
Address issue ol "advisors" vs. "sales lorce" Clearly provide value proposition around
perlormance·Lo·cosL raLio
Figure 5
Business strategy Customer strategy Product strategy People and
organization change
· Work closely with top
distribution partners and
vendors Lo prepare lor CRM2
· For asset managers with
a proprietary sales force,
establish an integrated
(manufacturing and
disLribuLion) CRM2 proqram
· Model impacL ol CRM2 on
investor switching behaviour
(e.g. to substitute products such
as ETFs, GICs, etc.)
· Analyze cost of providing
performance reporting to
orphaned (no advisor) client
name accounts
· Review advisor segmentation to
idenLily "aL risk" asseLs
· Provide dedicaLed CRM2
support to advisors with the
qreaLesL "aL risk" asseLs
· Review competitiveness (e.g.,
pricing, marketing support,
etc.) of F class, premium series
and porLlolio/wrap producLs
in light of potential increasing
demand
· Continue to innovate or evolve
investment solutions to clearly
articulate and distinguish
beLween advice (e.q., ?nancial
advisor) and portfolio
management (e.g., investment
fund manager)
· Develop a communication and
training strategy for wholesalers
and contact centre staff
· Anticipate increased demand
for practice management
support
A
c
t
i
o
n
s
t
o
c
o
n
s
i
d
e
r
I
l
l
u
s
t
r
a
t
i
v
e
i
m
p
a
c
t
8 | Client Relationship Model Phase 2
Implementing CRM2
LY's CRM2 lramework balances operaLinq model impacLs and sLraLeqic quesLions.
Figure 6
Strategic implications and opportunities
Business architecture implications
Business strategy Customer strategy Product strategy People and
organizational change
· Strategy and business model
· Business line ?nancials
· Segmentation and service model
· Client response and behavior
· Product and platform
lexibiliLy
· Product innovation
· Change management
· Organizational and resourcing
Dealers
· Enhanced cost disclosure
· AccounL/addiLional sLaLemenL
· CosL/perlormance reporLinq
Investment fund managers
· AccounL/addiLional sLaLemenL
· Duty to provide information
to dealers
Front and middle offce Back offce
Product Relationship management Client onboarding Investing Servicing Practice development Management and administrative
Data
Technology
CRM2
9 Client Relationship Model Phase 2 |
Reducing risks on implementation
lnvesLinq Lime up lronL Lo assess sLraLeqic implicaLions reduces boLh implemenLaLion and lonq·Lerm business risk.
Figure 7
Business strategy Customer strategy Product strategy People and
organization change
· Analyze revenue at risk under
different scenarios
· Model Lhe impacL ol exiLinq
oll·book business
· Lxplore alLernaLive sources ol
revenue (e.g., product shelf fees)
· Research likely reaction of
clients and advisors to taking the
"sLraLeqic approach" (see below)
· Educate clients on the value
of advice through relevant
channels of communication
· Analyze cost of service impact
for client segments and
deLermine new home ol besL ?L
· Design a consistent client
experience (lace Lo lace, online,
paper) across business lines
· RevisiL lee·based pricinq/lee
schedules to support increased
demand
· Consider new offerings for
client portfolios that consist
primarily of trail products
· Analyze aliqnmenL ol Lhe ?rm's
performance reporting with
Lhird·parLy reporLinq
· Engage advisors in design of new
reporLs · Lhey will need Lo explain
them to clients
· Anticipate increased demand for
?nancial planninq supporL
· Anticipate increased demand for
practice management support
· Create a change management
program to support advisors
LhrouqhouL Lhe Lhree·year
journey
A
c
t
i
o
n
s
t
o
c
o
n
s
i
d
e
r
While requiremenLs are prescripLive, you have some discreLion on how Lo comply. You can Lake a lonq·Lerm sLraLeqic approach
or opL lor a cosL·ellecLive LacLical response Lo Lhe requiremenLs · or any deqree in beLween. Reqardless ol Lhe selecLed
approach, a proacLive communicaLions sLraLeqy is essenLial Lo explain Lhe decisions made.
CRM2
requirements
2014
2016
2015
Strategic approach
Tactical approach
Regardless of selected approach, a proactive
communications strategy is essential
• “Spirit of the law” approach to compliance
• Requirements are seen as an opportunity to evolve the way in which the frm offers advice
• Long-term in nature
• Could involve signifcant investment in systems
• Could require changes to operating model
• “Letter of the law” approach to compliance
• Desire to comply with minimal disruption to existing operating model
• Focus on fnancial impact of compliance
• System impact kept to a minimum
In speaking with leading wealth
management providers in Canada,
we’ve made several observations as
frms continue their preparations to
comply with CRM2:
• Some frms are conducting customer focus groups
to inform decision-making.
• Misinformation in the feld still appears prevalent
across the industry.
• Dedicated change management will be key to
mitigating compliance and reputation risks.
• There are challenges implementing an enterprise-
wide approach vs. tailoring the implementation to
the unique priorities of each line of business.
• Finding the resources to adopt a strategic approach
is challenging given competing priorities, both
regulatory and otherwise.
11 Client Relationship Model Phase 2 |
We can help
1he condensed Limelines around Lhe CRM2 implemenLaLion are provinq Lo be a challenqe
Lo many ?rms as Lhey come Lo recoqnize Lhe maqniLude ol ellorL required beLween now
and July 2016. We can help acceleraLe your implemenLaLion wiLh a disciplined rapid
assessmenL approach and experienced resources who will brinq LoqeLher Lhe Lechnical,
business and operational considerations, whether you opt for a more strategic or tactical
approach to the implementation.
Our Leam ollers experience in such areas as:
· FuLure proo?nq Lhe clienL experience
· Program management
· AnalyLics: clienL and advisor pro?LabiliLy, cosL impacL, pricinq
· Implementation support: gap analysis, requirements, testing
· Compliance process/LesLinq sLraLeqy
· People and organizational change
Contact us
Our Canadian ?nancial services advisory pracLice brinqs many years ol
indusLry and advisory experience Lo help you naviqaLe Loday's challenqinq
wealth management landscape.
With broad capabilities across areas such as client segmentation, platform
harmonization, regulatory reform, target operating models and distribution, we can help
your ?rm Lhrouqh complex, LranslormaLional proqrams or LacLical prioriLy iniLiaLives.
Please conLacL us Lo discuss how we can supporL your orqanizaLion's CRM2 proqram.
Paul Battista
Financial Services
Advisory Leader
+1 ^16 9^3 3820
[email protected]
Gregory Smith
Wealth Management
Advisory Leader
+1 ^16 9^3 ^593
[email protected]
Jacqueline Miller
Financial Services Risk
Management Advisory
+1 ^16 9^3 3^99
[email protected]
David Hurd
Wealth Management
Advisory
+1 ^16 9^3 ^^29
[email protected]
Dave Inglis
Wealth Management
Advisory
+1 ^16 9^3 3831
[email protected]
Colin Bradley
Wealth Management
Advisory
+1 ^16 9^3 5^68
[email protected]
EY | Assurance | Tax | Transactions | Advisory
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A member firm of Ernst & Young Global Limited.
LYC no. LH0208
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ED None
This publication contains information in summary form, current as of the date of publication, and
is intended for general guidance only. It should not be regarded as comprehensive or a substitute
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