The regulatory initiatives known as Client Relationship Model, Phase 2 – or CRM2 – are tasked with bringing a greater degree of transparency to the financial-services industry when they come into play next year. But the rules will also apply to insurers, according to people in the know.
A spokeswoman for the Canadian Life and Health Insurance Association Inc. (CLHA), a non-profit association with members accounting for 99% of Canada’s life and health insurance business, told Insurance Business Canada the association does know that insurance regulators are looking at the issue. But the trade body is not prepared to speak on the matter further.
“The industry would be pleased to work with regulators on what disclosure material best serves the customer,” she said.
Last week, Rebecca Cowdery, a partner at Borden Ladner Gervais LLP, told a seminar of the Independent Financial Brokers of Canada (IFB) that she believes insurance regulators are looking at expanding CRM2-type disclosure to the distribution of insurance.
She would not go into further detail when pressed but hinted that such considerations were still in the nascent stages, although it is likely that dually-licensed advisors following CRM2 regulations when it comes to mutual funds will be asked to reveal the same details for their insurance products.
Though the investment industry is generally on board with CRM2, there's still some trepidation over how it will affect advisor-client relationships.
According to analysts at Morningstar Research, the biggest potential game-changer is greater transparency of fees, “which could lead to sticker shock on the part of investors.”
Because of embedded commissions that fund companies pay directly to commissioned brokers and dealers, many investors don't know the extent to which they're paying for advice and service or mere order execution.
The financial analyst warned that commission-based accounts will be the most affected, because with fee-based accounts there's greater transparency, because advisory fees are paid directly by investors, not indirectly by fund companies.
Kathy Waite, a fee-only wealth manager, told Insurance Business that she doesn't think CRM2 goes far enough.
“People in Canada pay double what the US and UK pay in fees and most of the time don't get much – a phone call once a year if you have less than C$300,000. The government is trying to make people see what they pay so they ask questions.”
Waite warned, however, that while CRM2 shows what the advisor gets paid, which may look like thousands, it doesn't mention the 20% to 50% that goes to the firm they work for, “and if you are self employed with overheads, no sick pay, vacation, or pension it's not as great as it looks.
“If I was an advisor I might feel seriously thrown under the bus. They disclose my income but not what they charge,” she said.
Waite said that while it's true people are complacent, they are also overwhelmed by jargon and have no idea how to evaluate the performance of their accounts to the market. “It would be more useful to focus on total return, then give this return after the fees so people can see what they gave up and judge if it was of value,” she said.
