Enhancing transparency and disclosure in client statements

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The final stage of Client Relationship Model – Phase 2 (CRM2) will be rolled out by most dealers in early 2017. That means preparing for important conversations with clients about new information they will see on their investment account statements.

There are two main changes:

  1. Performance reporting based on the Money-Weighted Rate of Return (also known as the Personal Rate of Return)
  2. Charge reporting that presents third-party compensation in dollars-and-cents terms

Performance reports

Investment performance reporting currently uses the Time-Weighted Rate of Return (TWRR). The TWRR isolates the performance of the mutual fund manager by stripping out the impact of the timing and size of individual investor deposits and withdrawals.

The new statements will report performance using the Money-Weighted Rate of Return (MWRR), which takes into account both the fund manager’s performance and the impact of individual investor decisions.

The MWRR provides a more nuanced picture of an account’s performance because investors’ buy and sell decisions have a significant impact on their ability to remain on track toward meeting their financial goals. Factoring in these decisions allows investors and advisors to better understand if any changes to the financial plan are needed.

Charge reports

The new charge report will provide a clearer and more detailed presentation of the fees and costs investors incur. There are two main sections:

  1. Fees investors pay directly to the dealer firm
  2. Compensation the dealer receives through a third party

The first section provides a dollars-and-cents accounting of charges for account administration, trade execution and other services. Investors will receive a total for each type of charge, plus a combined total for the entire category.

The section on third-party compensation will provide investors with a dollars-and-cents accounting of trailing and other commissions the dealer receives from mutual fund companies. Pre-CRM2, clients received this information in percentage terms.

Advisors typically receive a portion of third-party commissions as compensation for the advice they provide clients, but the statement will not specify that amount; it will simply show the total commissions paid to the dealer for a specific client account.

This section of the statement will also include a dollars-and-cents presentation of any referral fees the dealer receives with respect to specific client accounts.

CRM2’s improvements to performance reporting and fee transparency offer advisors an opportunity to enhance their client relationships. For more information on how to prepare for CRM2’s final stage, register for IFSE’s free course on CRM2 today.