New rules governing mutual fund dealers mean it’s become easier to see and understand what it costs to invest in mutual funds. The second phase of this multi-step process, known as CRM2 (Client Relationship Model 2), took effect in 2016, with the goal of providing complete, timely, true and plain-language information to investors. If you own mutual funds, you will see some differences on your next annual statement.
The big change is the kind of information that dealers will now be required to include on your account statements, in the interest of complete transparency about both performance and costs.
You’ll see a detailed description of how your portfolio has performed during the period being reported on, in both dollars and percentages, in plainer language that will help you better understand the investment choices you’ve made and how they are being reported. You’ll see information you may not have seen before, such as opening and closing market values, value of all deposits and withdrawals, changes in account value and your personal rate of return.
And you’ll see a dollar breakdown of the fees you pay to your dealer as part of your investment portfolio, including trailing commissions (which cover the cost of the financial advice you receive), as well as the operating expenses and taxes you pay.
The CRM2 change affects how easily you can see the fees, not the fees themselves. So what you won’t see are any new costs.
How a mutual fund sale works
There are 4 parties involved in a mutual fund sale:
- The client (you)
- The advisor or salesperson, who works with you to choose the most appropriate fund
- The dealer, which is the firm where your financial advisor is registered and which processes all the paperwork every time you buy or sell a mutual fund – the fees the dealer receives are for all the administrative services it provides in connection with your portfolio, including quarterly and annual statements and the online access you have to your accounts
- The investment fund manager, which created the fund by selecting from a range of stocks, bonds, money market instruments and other investments
Every mutual fund has its own management expense ratio (MER), which is a percentage used to calculate your cost to invest in the mutual fund. A portion of that cost you pay goes to the investment fund manager, and a portion (1%) goes to the mutual fund dealer. The dealer then pays a portion to its representative – your advisor. Note that investment fund managers don’t pay your advisor. This means he or she can make recommendations for you, based solely on helping you achieve your goals.
Fees are always charged as a percentage of your investments, so they will go up or down as the value changes. If the value of your investments decreases, the fee percentage will stay the same, but the dollar amount you pay in fees will decrease proportionately.
What you get for your money
In return for the fees you pay your advisor, you get real value. You can expect your advisor to:
- Listen to your goals and concerns, and offer solutions tailored to your own situation
- Tell you what you’re paying for and why
- Show you how your investments are doing
- Help you navigate through your statements
- Identify and understand your needs, goals and objectives
- Work with you to develop a plan to preserve and protect your money
- Recommend a diversified portfolio that matches your risk tolerance, comfort zone and investment objectives
- Help you stick to a disciplined investment process
The CRM2 changes are all about giving you more information about your investments – and the better informed you are, the better you’ll be able to work with your advisor to develop an effective plan for your financial security.
- Looking for more useful information on mutual funds and other personal finance topics? Subscribe to the Money for Life newsletter for free tips and tools on money and health.