Advisors may soon have to justify how they get paid to clients, and could face disciplinary action if a regulator deems that structure inappropriate.
IIROC released a draft guidance note regarding compensation structures for retail investment accounts, which highlights four issues: suitability at account opening; disclosure; account supervision; and double-charging clients.
The regulator proposes suitability encompass whether an account is fee- or commission-based. This will also affect account transfers.
“We expect that a Dealer Member or individual adviser will only move a client from a commission-based account to a fee-based account (or vice-versa) when such a change in service offerings is demonstrably beneficial to the client,” says the notice.
“The absence of any demonstrable benefit, depending on the facts and circumstances of the case, may give rise to regulatory scrutiny and, in more extreme cases, disciplinary action.”
In anticipation of CRM requirements, which call for increased fee disclosure, IIROC’s draft notice encourages existing compensation disclosures “to include a plain-language explanation of the method for calculating commissions or fees associated with each type of account.”
IIROC is also concerned fee-based clients may be paying both embedded charges and ongoing fees based on a percentage of the value of the securities.
“When fees are embedded or paid by a third-party product provider to the investment advisor, there is a concern that clients may not be aware that such fees exist and are ultimately being passed on to them,” the notice says.
IIROC’s guidance note complements Client Relationship Model rules, which are currently being implemented in phases.
Regulated firms and others have 90 days to comment on the draft. Direct comments to:
Robert Keller, Policy Counsel
Investment Industry Regulatory Organization of Canada
121 King Street West, Suite 2000 Toronto, Ontario
Canada M5H 3T9
Fax: (416) 943-5891