As regulators ponder upfront commissions on segregated funds and push to ban deferred sales charges, advisors and lifecos say chargebacks are a more client-friendly alternative to DSCs.
The Canadian Council of Insurance Regulators (CCIR) and the Canadian Insurance Services Regulatory Organizations (CISRO) continue to assess “the risks and benefits associated with sales charge options that pay upfront compensation,” including chargebacks, a CCIR spokesperson said.
The groups are analyzing submissions to last year’s consultation on banning upfront commissions, which ended Nov. 7, and plan to “re-engage” with stakeholders in 2023.
Similarly, the Financial Services Regulatory Authority of Ontario (FSRA) will be “moving forward with a policy position” on upfront commissions — including chargebacks — for seg funds later this year, FSRA insurance conduct head Erica Hiemstra said at a panel discussion earlier this month.
Chargebacks are better for seg fund clients than DSCs, said Asher Tward, vice-president of estate planning with TriDelta Financial, in an interview.
“If you sell a product [with an advisor chargeback] on the life side, it better be a good product, because if the client finds out in two months that they were sold something terrible and they cancel it, you would have to pay back all your commission,” Tward said. “So a chargeback structure is exactly the way it should be, because the advisor should take full responsibility for that client. If you want to keep them for a period of time, you’ve got to put in the work to do that.”
Chargebacks should not pose a risk to an advisor unless a client wants to move money within a couple of years of purchasing the seg fund — such as to cover an emergency or buy a home, said Toronto-based advisor Brian Shumak. An advisor who’s going to sell a client the wrong seg fund “for the sake of a fee is really going to do it independent of the parameters that are out there,” he said.
Shumak added that clients with time horizons shorter than three years should generally not invest in seg funds in the first place.
Advisors need to get paid for their services, “but there has to be accountability behind that compensation as well,” Tward said, adding that he favours a chargeback model in which the percentage an advisor has to repay gradually reaches zero over time.
If a client redeems a seg fund a year after purchase because the fund underperformed the market “dramatically,” the advisor would face a chargeback, so the “onus is on you to be good at selecting the right investments for that client and making sure they’re happy and servicing them,” Tward said.
One potential concern with chargebacks, however, is advisors might “encourage customers to invest or stay invested in segregated fund contracts when this choice is not in the customers’ interest,” a CCIR spokesperson said.
Chargebacks can also create conflicts of interest because some advisors may recommend seg funds that pay the most commissions upfront instead of ones that best serve a client’s interests, FAIR Canada said in its submission to CCIR and CISRO’s consultation.
BMO Insurance countered in its submission that a ban on both DSCs and chargebacks would pose an “existential” threat by reducing consumer access to seg funds, “as many advisors could be expected to exit or not enter the market.”
Allowing advisor chargebacks gives investors “with fewer assets access to advisors and advice under an economic model that is sustainable for both consumer and advisor,” a submission from Canada Life added.
“We use chargebacks [on seg funds] because we actually think it’s a good alternate to [DSCs],” said Ali Ghiassi, vice-president of industry affairs and government relations with Canada Life, during the Advocis Regulatory Affairs Symposium in October, adding that seg funds have “longer tails” than mutual funds and are therefore less likely to be subject to a chargeback.