Industry struggles with hurt feelings, debates principles at CSA roundtable

December 7, 2016 | Last updated on December 7, 2016
4 min read

“It feels like you’re beating up on advisors.”

That was an audience comment at the Toronto roundtable discussion on CSA’s proposed targeted reforms and best interest standard, held yesterday. Panellists’ stories about poor investor outcomes — such as large losses from deferred sales charges when switching accounts — highlighted how compensation drives advisor behaviour.

But far from blaming advisors, panellists grappled with the best way to manage conflicts.

Disclosure doesn’t work, says Ellen Roseman of the Canadian Foundation for Advancement of Investor Rights. She wants to see an end to conflicted compensation models and the pressure to increase assets; otherwise, CSA’s proposal doesn’t go far enough.

“Compensation and incentives are at the heart of what drives conflicts of interest,” says Eric Adelson, counsel at Invesco Canada, who thinks conflicts are best addressed by both an overriding principle, like the proposed best interest standard, and the proposed targeted reforms, assuming they’re enforced. He says some rules, like NI 81-105 Mutual Fund Sales Practices, aren’t enforced, calling into question the point of making new ones.

Prema Thiele, a partner at Borden Ladner Gervais, reserves comment on compensation conflicts until CSA publishes its paper on mutual fund fees. However, compensation shouldn’t be considered a conflict in and of itself, she says.

Read: Stop, look and listen–will regulators slow pace of reforms?

KYC, KYP and suitability

Panellists expressed the need for flexibility in 33-404.

“KYC is a process; it’s not a form,” says Rosemary Chan, senior vice-president of compliance at Scotiabank. That process involves in-depth advisor/client discussions. Instead of codifying KYC best practices, she suggests additional KYC elements become part of those discussions. Further, consistent terminology should be used when, for example, risk is explained.

While KYP reforms focus on firm lists, suitability must be assessed in the context of a portfolio, say panellists. Proposal concepts about what’s permissible or not permissible within the context of firm lists fail to recognize advisors as investment professionals who can choose products for their clients, says Chan.

Suitability reforms, which would require product selection “most likely to achieve” client objectives, are criticized as reducing choice to the least risky products. But that’s not inevitable, says Gerry Rocchi, a corporate director and former IIROC chair, if advisors take a portfolio approach to selection.

After embedded commissions were banned in the U.K., he says clients continued to pay for active management. If advisors offer competitive portfolios, they won’t default to low-cost, low-risk products. Combined with the best interest standard (or something similar), the proposed targeted reforms free the advisor “to choose from sometimes higher-cost products, because that higher cost is not tied up in advisor compensation,” he says.

The result: Risk is chosen independent of conflicted compensation models, and portfolios are healthier and “most likely” to achieve investor outcomes.

Read: MFDA too lenient on pre-signed forms, going after dealer members

Advice gap/expectations gap

The proposal is criticized for potentially increasing the advice gap. Innovation to make advisors more efficient can help, says Paul Bourque, president and CEO of IFIC. He gives the U.S. example of Vanguard, which launched an advisory channel using robo-advice in combination with 400 advisors.

However, Rocchi wonders how well fintech solutions serve seniors.

When it comes to closing the expectations gap, the panellists largely favour the proposed best interest standard.

Lorie Haber, a corporate director and former industry executive, says convergence in firm ownership and structure has resulted in increased conflicts. Further, during the last 30 years, industry perceptions have evolved: salespeople conducting transactions are now advisors managing relationships. “The securities regulatory fabric hasn’t kept pace with that,” he says, resulting in the expectations gap.

According to Brondesbury Group research, 70% of investors believe their advisors have a legal best interest duty, he says. It’s time the industry either disavows that duty — a step backward — or embraces it.

“This is a principle-based stance,” agrees Randy Cass, CEO at Nest Wealth Asset Management. Suitability, disclosure and rules have failed, he says, but there’s no way around principles.

And a principle-based approach has the flexibility to adapt to different models, says Margaret McNee, a senior partner at McMillan.

Read: Compliance officers targeted for enforcement

Ian Russell, president and CEO of IIAC, cites the AMF’s sound commercial practices as a good example of guidelines that achieve desired client outcomes. When it comes to a best interest standard, expectations must be defined, he says, so advisors understand how to discharge their responsibilities.

The lack of a national consensus for the proposed best interest standard doesn’t concern some panellists. “Progress is always someone [like the OSC] stepping out in front,” says Cass.