CRM3 explained: What your Investment Fees will actually show

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Keith: Welcome to The Empowered Investor. My name is Keith Matthews, and I’m joined by my co-host, Michael Baldoni. Michael, how are you today?

Michael: Doing very well. Thank you for having me again, Keith. I’m looking forward to it.

Keith: Mike, this is our second show in a row. For our listeners, Mike is our chief compliance officer and director of operations. Our previous episode was on fiduciary versus suitability advice. Today we’re talking about CRM3, a new report coming out in the first quarter of 2027 for all investors in Canada.

We’ll cover the evolution: where CRM3 came from, since there was a CRM1 and a CRM2 before it. We’ll look at what investors are going to see in this new report, and the implications for clients, investors, and firms. We’ll talk about who the winners are, which is ultimately the Canadian investor, and which firms are going to be under pressure. And you’re going to give us a series of questions investors should be asking.

Mike, I can’t think of a better person to have on for this. It’s a compliance topic, but listeners, please bear with us. This is fascinating, it’s revealing, and it’s a big deal.

Michael: I appreciate it, Keith. As much as compliance topics can be a little duller than others, this one has a real impact on what clients get to see and what they’ll be paying for. We’ll get into the details, but I think it’s going to be very worthwhile for our clients.

Keith: Awesome. So let’s jump right in, Mike. What is CRM3?

Michael: CRM3 is a term used in the industry for what’s really the next evolution of investment cost transparency. There are always costs associated with the funds clients hold and the fees they pay. This is the next level of transparency, letting clients see exactly what they’re spending and where their money is going. It’s going to paint the clearest possible picture yet of how fees are paid, to the funds and to the firms clients deal with.

Keith: And just to recap, CRM2, which came out a number of years ago, required any firm providing advice to report the advice fee in dollars and cents, on an annual cost, fees, and charges statement to clients.

Michael: Correct.

Keith: This will go further. Not only will firms need to show advisory fees, but if a firm uses any kind of fund or strategy within the portfolio, those costs will now show up as a line item in dollars on that same report.

Michael: That’s correct. These are often called embedded fees, the fees inside the funds themselves. You’ll now have a specific line item for those, in actual dollars.

Keith: As a firm, we’ve always shown and discussed the underlying costs within the strategies we use, whether that’s an exchange-traded fund or a Dimensional Fund Advisors strategy. We’ve shown potential clients who join us all three layers. What’s interesting now is that this is becoming mandatory across the entire industry.

Michael: Absolutely. And it’s an actual dollar amount, which is very different from what people may have seen before in percentages. It stings a little differently when you see a dollar figure instead of just one percent, two percent, three percent of a total.

Keith: We’ll come back to this. But let’s go through the evolution. If this is CRM3, what were CRM1 and CRM2?

Michael: Good question. CRM1 first came out in 2009, and it was a higher-level standard. It was about the relationship between the client and the firm: what services do you provide, how is the firm compensated, what are the firm’s responsibilities, what should the client expect. It required documentation behind all of that. Most firms used a relationship disclosure document to explain those things to clients. That was 2009.

Keith: I remember when this came out. Regulators were essentially saying Canada’s landscape needed to improve, and their vision was transparency, openness, and clarity. CRM1 was about how you operate: tell me exactly, and document it. I remember building our first client relationship disclosure document with Don in 2008, right in the middle of the market meltdown.

Michael: Right.

Keith: And documenting exactly how we operate became a standard document we had to show every client.

Michael: A lot of firms were probably already doing many of these things. What changed is that you now needed it documented, and it needed to be presented to clients.

Keith: Even looking back, a lot of firms were doing it, but it was always a bit wishy-washy. The investment industry has changed dramatically over the last 25 years.

Keith: Okay, so let’s skip forward to CRM2.

Michael: CRM2 was adopted between 2013 and 2017. That’s when the industry finally had to answer: what do I actually pay your firm, and how did my portfolio perform? It brought more disclosure around performance reporting, based on money-weighted returns. So the next step, after CRM1 told you what services you get, was CRM2 telling you what that actually costs.

Keith: This was a big change for the industry as a whole, though it wasn’t for portfolio management firms. We’ve been disclosing performance since 1996, and most PM firms did the same. It was simply part of hiring a discretionary portfolio manager: you got your returns reported back to you. What changed was that the entire industry now had to do it.

Back then, if you were with a stockbroker picking stocks for you, you didn’t get a performance report. Your portfolio might have started at a certain value, but you never got a rate of return. If you were in a series of mutual funds, each fund would report its own rate of return, but your total portfolio was never disclosed. CRM2 forced everyone to start reporting money-weighted returns, which was huge, along with reporting in dollars what clients were being charged annually.

Michael: Correct.

Keith: Okay.

Michael: Fast forward a few more years, and we’re where we are now with CRM3. The question becomes: what did the investments actually cost me? What’s my all-in cost for dealing with the firm and with the funds I hold?

Keith: So let’s get into the actual calculations. This is what investors are going to see in these reports.

Michael: Yep.

Keith: If you’re with a firm that just does stock picking, and you pay for that advice, you won’t see any additional fees. It’s the advisory fee, and that’s it.

Michael: Correct.

Keith: If you’re with a firm that uses mutual funds, exchange-traded funds, or alternative strategies, that’s the part that’s now also going to be reported.

Michael: Correct.

Keith: And within that secondary reporting, there are multiple layers. Which expenses actually need to be shown to a client?

Michael: That’s the tricky part, because everything needs to be disclosed. The first thing clients will probably see on their new report is an acronym: FER, the fund expense ratio.

Keith: F as in Frank?

Michael: F as in Frank, E as in Eric, and R as in rhino, let’s just say.

Keith: FER.

Michael: FER, the fund expense ratio. People are probably asking what that actually includes. It’s made up of the fund’s management expense ratio, the MER people are more used to seeing, plus the trading expense ratio, or TER. You’ll see both as line items, adding up to a total in dollars.

Keith: It’s remarkable that this is now going to be shown. Firms like ours, and every firm, have worked hard over the past year to make sure their portfolio management systems can actually show this. Most people are aware of an MER, but they know it as a percentage, not a dollar amount. What they’re not aware of is the extra layer on top of the MER called a TER. T as in Thomas, E as in Edward, R as in…

Michael: I used rhino. I could have used plenty of others, Robert probably would have been easier.

Keith: Most people don’t know what a TER is, but we’re talking about it anyway. The TER covers all the trading expenses inside the investment. If there’s a lot of active trading, the TER might run 6 to 10 basis points, for example. In the strategies we use, it’s 1 basis point. Index-based or passively managed strategies have very low TERs. But now this is all going to come to the surface.

Michael: Absolutely.

Keith: This FER is going to include MER and TER as a percentage and then reported as a dollar amount to clients.

Michael: Exactly, and it’s worth mentioning these aren’t new fees. I want to be clear that no one is trying to pull a fast one here. These fees always existed. This is simply the first time they’ll get their own line item with an actual dollar figure attached. These fees were always disclosed to clients, but there’s a difference between disclosure and transparency. Disclosure means I’ve told you about them, somewhere. Transparency means it’s now going to be right on your report, crystal clear, how much you paid.

Keith: You keep using the word clients. Let me rephrase that for our listeners as investors at large.

Michael: Absolutely, you’re right.

Keith: Investors at large are now going to see these things. Our clients have always seen them in different reports, in investment policy statements. When someone becomes a client, we show them their MERs every time. We used to talk about the TER too, and everybody’s eyes would glaze over, but now it’s actually reported and shown. When we sat down with a potential client, we’d show three cost items: our advisory fee, the MER, and our custody charges.

Michael: Right.

Keith: So they’d see all of it. What we’re talking about now is that every Canadian, including our clients, is going to see these new reports with the advisory fee, embedded fees, and custodian fees, all on one report, all in dollars.

Michael: That’s exactly it. TMA clients are probably in pretty good shape for this new reporting, since our portfolio managers walk them through it, and it’s already in our IPS and our disclosure documents. We’ve told clients about this, so it shouldn’t be much of a sticker shock, compared to investors who’ve never had that conversation with their advisor. For them, seeing an actual dollar amount for the first time could sting a bit.

Keith: One of the reasons we’ve been so transparent is that we’ve always felt it was part of the conversation. Over the last 25 years, part of our value proposition has been a clear advisory fee, low underlying embedded fees, and a full range of services, competing against other firms that often carry higher fees and offer less. We bring all of this to people’s attention because we’re intentional about being transparent. That said, even our own clients are going to see a statement with our fee and the underlying fee spelled out. Let’s walk through an example. You had some figures for a $500,000 client, but let’s use a $1 million portfolio, since the math is easier.

Michael: For $1 million, you’d start with your firm’s cost, the management fee your portfolio manager charges, which could be around 1%, whatever it ends up being.

Keith: Fair enough, so that’s 1%: $10,000 will show up, either in a registered account, where the fee isn’t tax deductible, or in a non-registered account, where it is.

Michael: Exactly.

Keith: That’s the first line item.

Michael: Line item one. Line item two is the MER, the management expense ratio.

Keith: Unless you’re picking individual stocks, in which case that’s zero. But if there are strategies embedded in the portfolio, now let’s talk.

Michael: You’d have that line item. Keith, you’d know better than I would what a normal management expense ratio looks like for a mutual fund.

Keith: There’s a whole range of different cost structures. If you’re using actively managed F-class strategies, management fees might run 70, 80, or 90 basis points, even 1%. So that’s 1% plus that other layer of fee.

Michael: Right.

Keith: If you’re using the lowest-cost exchange-traded funds to build a globally diversified portfolio, you might be at 15 basis points, so $1,500 would show up.

Michael: Right.

Keith: Our strategies come in around 25 basis points, so you might see $2,500 on top of that. Now you can see the difference, the different layers of fees that make up the total cost of a portfolio.

Michael: Right, that’s fee number two. Line item three is the TER we mentioned before, another line item that will appear on the report.

Keith: TERs vary. An actively traded strategy might run 10 basis points. Canada’s largest mutual fund, which we checked before this show, has a TER of 6 basis points. Our strategies run at 1 basis point. All of this now gets reported, and it adds up into the FER.

Michael: That’s your FER total. Then you’d also have custodian fees included.

Keith: An independent firm like ours adds in custodian fees separately. At a large bank, custodian fees are usually bundled in, but ours typically run 1 to 3 basis points.

Michael: Right.

Keith: But it’s now shown as a separate line item.

Michael: Right, so line items one through four add up to your total cost.

Keith: What I find fascinating is that if you’ve been an investor in Canada using high-fee strategies but were never entirely sure of the cost, you’re now going to see it all. And if you’re an advisor using high-fee strategies, you’d better be able to defend them, because the pressure is coming.

Michael: Very much so.

Keith: I’ll go further. If you’re at a big bank, at the retail branch level, not getting much in the way of wealth management services, and you have a large portfolio sitting in a bank mutual fund, you’re now going to see a large management fee show up.

Michael: Right, and this connects to the value proposition you mentioned earlier. Sometimes people are willing to spend a bit more for the service that comes with it. Cheapest isn’t always the best answer, even though someone might look at these numbers and think the safest move is to just go the cheapest route.

Keith: The cheapest route is to do everything yourself, using no services at all, by far the cheapest option. But the research shows only a small percentage of people can actually pull that off. Most people benefit from guidance, a managed program, and a range of services, whether that’s planning, tax efficiency, or investment services.

Michael: Very much so. For investors in general, if you knew you had to pay a certain amount in fees, but you also knew you’d be getting financial planning, tax advice, and everything else that comes with it, plenty of investors are comfortable with that. It’s cheaper for me to cook a hamburger at home, Keith, but if I go to a restaurant, it costs more because I’m getting more service. People are willing to spend a bit more for a full slate of services, rather than just walking into a branch, having someone sell them a mutual fund, and walking back out.

Keith: This is going to light a fire around awareness of costs and services. That’s really the regulators’ intent, putting information in front of clients so they can make educated decisions about what services they want and the value they place on them. It’s going to create discussion and awareness, and I think it’s a wonderful evolution. Boy, I was passionate about this before we went on air. If you’re at an organization charging very high fees for a small amount of service, you’re going to be under pressure, and rightfully so. Very few businesses could survive that.

Michael: That makes sense, and there’s a big difference between cost and value. Those aren’t the same thing. What a client or investor wants is to feel that if they’re spending money, they’re also getting real value from it. That makes it far easier to be comfortable spending that money, knowing what comes with it. I think what CRM3 is going to show is, if I’m paying for something, what am I actually paying for, and what am I getting out of it?

Keith: Absolutely, one hundred percent agreed. Let’s keep going, Michael. We said these fees aren’t new, that they were already disclosed. Remind people where these fees were disclosed before.

Michael: The fund facts document was often the primary place you’d see where fees were located. Sometimes they were disclosed in a disclaimer at the bottom of a table, or at the end of a statement. Now it’s going to be crystal clear. And like we said, it wasn’t necessarily a dollar amount before, it was a percentage. Now it’s going to be front and center, the amount you’re actually paying. There’s no way to hide it anymore.

Keith: Fair enough. Follow-up question: does having an embedded cost in a strategy automatically make it a bad thing?

Michael: Not at all. A higher fee doesn’t automatically make something bad. The real question is what you’re getting out of it, and whether it provides value. Nothing in life is free, and investment funds are no different: there’s always a cost. If you’re comfortable with that cost relative to the reward and value you’re getting, that’s okay too.

Keith: Absolutely. There’s a hierarchy of layers here. The cheapest is do-it-yourself.

Michael: One hundred percent.

Keith: But the do-it-yourself outcome isn’t necessarily the best outcome.

Michael: Right.

Keith: Depending on portfolio size and complexity, most people want some advice. The next cheapest option is hiring someone for an advisory fee who just picks stocks, so there are no embedded costs underneath. But then you’re taking on the risk of whether that’s going to deliver good performance and the right stock selection. The research shows real advantages to using low-cost, index-based strategies, which give you diversification and risk management. You pay a bit more for those benefits. Those are the tradeoffs people weigh. And the last thing people evaluate is what services they actually need. Can they do investment management alone? We’re seeing planning as a huge growth area: retirement planning, estate planning, tax planning, and that has to come from somewhere.

Michael: Right, exactly.

Keith: A lot of places don’t provide that, and some do. This is going to give investors the ability to see and understand what’s actually being provided for those services.

Michael: Right, transparency and choice. I think that’s what the regulators were hoping for with this new regulation: everything crystal clear for clients, with all the information they need in front of them to make the best decision for themselves and the services they want.

Keith: Fantastic, this is amazing. Let’s switch gears and talk about the winners and the losers.

Michael: I’ll push back slightly there, Keith. I wouldn’t necessarily call anyone a loser. I’d say it’s more about who’s going to feel the pressure.

Keith: Fair, let’s go with that. So who wins here?

Michael: Ultimately, it’s always going to be the client, the investor, who wins. The whole initiative was about making things transparent, so there are no hidden costs. Not that they were hidden before, but now it’s written in front of you, in dollars. You know exactly what you’re paying and exactly what you’re getting. For the investor, this is a clear win.

Keith: I agree, one hundred percent. This is a game changer. We’re heading into a completely different era, and it’s fantastic for investors. I’d add that other winners will be certain investment strategies: index-based approaches, whether exchange-traded funds or low-cost index funds, passively managed strategies, and even low-cost active strategies.

Michael: Yep.

Keith: Assets will gravitate toward lower-cost strategies, because once people become aware of this, they’ll start researching performance too, and they’ll find that lower-cost strategies typically come with better performance over longer periods.

Michael: Typically, yes. Investment returns will fluctuate over time, but the fees will always be there. Investors need to realize that too, and now, on the reporting, they’ll see the actual dollar figure of a cost that never goes away.

Keith: One hundred percent. And the opposite holds too. Which groups do you believe are going to be under pressure?

Michael: I’d point to retail branch-level advisors. Those individuals will probably struggle more, since there are often no other services attached. It’s essentially, here’s the mutual fund we offer at this bank, the fees tend to be higher, and there’s nothing else that comes with it. Financial planning isn’t necessarily offered to every client who walks in the door. That’s a lot of money for just an investment fund.

Keith: You’re absolutely right, that individual is under pressure. As for groups, I think large banks will feel pressure too, because they’ve built higher-cost strategies sold at the branch level, which is exactly what you’re describing.

Michael: Yeah.

Keith: The largest mutual fund in Canada right now is the RBC Select Balance Fund. It holds $78 billion, and its total FER is 2%: an MER of 1.94%, plus a trading expense ratio of 6 basis points. If you’re paying 2% on a $2 million portfolio and not receiving any services, that’s a fund and firm that might be under pressure.

Michael: That’s exactly right, Keith. And that information is readily available online, it wasn’t difficult to find. Just a fun fact.

Keith: I’m not singling out one specific bank, I just pulled up the largest mutual fund in Canada, and every bank has dozens of these strategies. That’s one group I think will be under pressure. The other will be financial advisors who use high-fee strategies without offering a full range of wealth management solutions. There are plenty of advisors doing excellent, diligent work, but the group that isn’t doing as much will feel that pressure.

Michael: People are going to realize that they’re spending a lot of money for not a lot of service. And I think we’re now at the point where people could potentially start looking for alternatives.

Keith: Mike, you joined our firm a year ago, and you’ve done an amazing job in compliance. Chief compliance officer, in charge of operations. I’ve told you this before, I’m so excited about our future. For us, this is a three-decade story, and we’re so appreciative of our clients and how invested they are in the process. I’m proud of our team, in portfolio management, financial planning, and tax work. I think the wind is in our sails when it comes to our value proposition.

Michael: Right.

Keith: Super excited about the future. Mike, let’s wrap up. What should investors be asking their advisors?

Michael: It’s worth investors taking the time to fully understand what they have. What am I invested in, what funds, how does this work, how much is this costing me, and what services am I getting from it? Now that you can see the dollar figure of what you’re actually spending, ask where that money is going, and what you’re getting for it.

Keith: Fair enough. How long do you think it’ll take for people to digest this information, and for real change to happen in the industry?

Michael: As you mentioned, the first statement under these new rules will land in 2027. I’d be surprised if, right after seeing that first dollar figure, people immediately start looking elsewhere. But relatively soon after, within the next few years, I think we’ll see a real shift, away from high-cost, low-service providers and toward firms offering a fuller range: investments, financial planning, estate planning, tax preparation. I can really see people making that move.

Keith: I like your optimism. Personally, I think it’ll take five to seven years of people digesting this information, through conversations over dinner and everywhere else, as things become more transparent, which is ultimately what the regulators are trying to do. There was a report, I believe by Glorianne Stromberg, done in the mid-1990s for the Ontario Securities Commission, that said Canadians were paying far too much in fees and getting far too little in return.

Michael: Right.

Keith: I think this is part of a twenty-year journey where regulators have been trying to make a difference. I’m super excited about this, and I think it’s great for investors. Mike, any final comments?

Michael: For final comments, our TMA clients are in very good shape for this regulation. There shouldn’t be much sticker shock on that first statement. Other investors may be in for a bigger surprise the first time they see their statement in 2027. At the end of the day, even though this is a new regulation, it’s a very good thing for clients, and that’s the main thing I want people to take from this. The fees always existed. This isn’t a new type of fee, just a different, more transparent way of displaying it.

Keith: Well said. I’ll finish with this: the name of this podcast is The Empowered Investor, and in the book The Empowered Investor, we dedicated a lot of time to these exact subjects. I think Canadians are going to become far more empowered with this evolution. I’m excited, for our listeners, for our clients, for everybody.

Michael: There we go. It’s going to be a good year finishing 2026 strong, going very strong into 2027.

Keith: Mike, thank you so much. This is your second podcast, and you’re a natural at it. We’re picking subjects some people might think are dry and dull, but there’s so much valuable information here. Thank you for sharing your knowledge and expertise today.

Michael: Thanks very much for having me, Keith.

Keith: And to our listeners, thank you so much. We look forward to speaking with you next time.

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