In an industry where the definition of “financial advice” is becoming blurry, regulatory disclosure does not solve all issues, says Andrew Kriegler, president of IIROC.
Regulators need to adapt faster to an environment where clients want more control over their investments and may perceive online products and services as offering them financial advice, Kriegler told a financial advisor conference in Toronto on Thursday.
“If your model portfolio is telling you to buy stock X, stock Y, stock Z, and that bond over there, that starts to look an awful lot like advice,” he said, noting there are suitability obligations for advisors and their clients.
IIROC has proposed new guidance for order-execution only (OEO) services, or online discount brokers like RBC Direct Investing, Questrade or BMO InvestorLine, that are currently exempted from suitability obligations, as long as they are not providing recommendations to clients.
Effectively, regulators are becoming concerned that a wealth of online tools and services is helping to create misalignment between what clients want and what they need.
As the scope, complexity and sophistication of online tools increases, Kriegler said, users of the services could misunderstand the tools. It could be like mistaking a wrench for a kit on “how to repair your home electrical system,” he said.
“The provision of tools, of services, of business models, is blurring the lines,” he said. “The regulation of those different service delivery models needs to be more proportional to the service offering, and the risk being delivered to the client.”
Regulators are often using traditional KYC and suitability obligations that assume a long-term client relationship, he said, when it’s clear some clients are looking for a different relationship — and more control.
“We have to acknowledge that disclosure is not a panacea,” Kriegler said, speaking generally about regulation. “Disclosure does not get you out of an irreconcilable conflict of interest.”
During a panel discussion about the CSA’s proposed ban on embedded commissions, Paul Bourque, head of the Investment Funds Institute of Canada, said the regulator has raised good questions but hasn’t made the case for a complete ban.
One of the biggest problems, Bourque said, is whether clients are aware they are paying the embedded commissions.
“Yes, there’s a conflict of interest, but is the complete prohibition the only [way]?” he said, adding that clients should have their choice of products. “We will be proposing, in terms of our response, ways of continuing a choice.”
Bourque said there is “huge pressure on fees” and predicted they will continue to drop from the current rate of 2%, what he said was the average cost of owning a mutual fund. “I think it’s going to be lower a few years from now,” he said.
Maureen Jensen, head of the OSC, said during a separate Q&A that there is a relationship between higher-commission products and how much advisors sell them.
“There should be an agreement on those fees [with the client], and they should be very visible,” Jensen said. “[But] simply by disclosing the fee, how do you address the conflict that, more often, [the] higher embedded fee [products] get sold?”
The conference, titled “the New Paradigm of Financial Advice,” was hosted by the C.D. Howe Institute, the University of Calgary’s School of Public Policy, CIRANO and the Toronto Financial Services Alliance.