On April 25, 2024, the Canadian Securities Administrators (CSA) published two research reports that examined how the implementation of the Client Relationship Model Phase 2 (CRM2) amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) have impacted the investment fund industry and investor behaviour. The report looked at a 7-year study period, from January 2013 to December 2020. The study period chosen was designed to isolate the impacts of the CRM2 amendments while controlling for the impacts of other regulatory changes. The CSA conducted their analysis in three time periods: 2013 to 2020 (the total study period), 2013 to 2016 (pre-implementation period) and 2017 to 2020 (post-implementation period).
The purpose of the research was to test the CSA's hypothesis that increased disclosure of fees and performance information because of the CRM2 amendments would enable retail investors to make more informed investment decisions, resulting in market-wide impacts of lower investment fund fees and better performance.
As a recap, the central aim of CRM2 was to improve transparency and disclosure of information to investors, particularly in respect of fees and performance of investment accounts. CRM2 introduced the reporting requirement of two annual reports: the report on charges and other compensation and the investment performance report.
To test the hypothesis, the researchers examined changes in mutual funds and exchange-traded funds (ETFs) by asking the following four questions:
- Have investment fund managers (IFMs) lowered fees, specifically management expense ratios (MER) and management fees, and what is the extent of these changes?
- Have product manufacturers and product distributors been shifting to products that are not captured by the new account costs and performance disclosures?
- What have been the changes in product creation and distribution trends?
- Has greater transparency about investment returns led to IFMs improving the risk-adjusted performance of their mutual funds and ETFs?
The findings were generally as follows:
- MERs and management fees decreased for both mutual funds and ETFs over the total study period.
- There was no evidence that product manufacturers and distributors shifted to products that were not subject to CRM2 requirements.
- There was an increase in popularity of fund-of-fund products for both mutual funds and ETFs over the total study period.
- There was a substantial increase in growth of the ETF market compared to mutual funds.
- Within the mutual fund market, there was a notable shift towards fee-based series away from commission-based series over the total study period.
- Demand for products with an ESG mandate increased.
- There was a rise in online advisers.
- Risk-adjusted performance improved relative to chosen model benchmarks in the post-implementation period.
The CSA emphasized that changes in industry behaviour can not be attributed directly to CRM2, as other factors that can not be accounted for in the analysis may have contributed to these changes.
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