Compliance to eat into advisor payouts

Be warned, says one veteran advisor: Growing compliance requirements promise to cut into advisor payouts from their dealers.

Be warned, says one veteran advisor: Growing compliance requirements promise to cut into advisor payouts from their dealers.

“If you look at payouts in mutual fund dealerships, 85% to the branch is on the higher end,” says Whitby advisor Mark Matsumoto. “The payout to a new guy was 50% when I started, so it may be lower. I was at 80% which is high but got cut to 77.5% because the dealership has very high compliance costs.”

Somebody has to pay the costs of the increased regulation and compliance that will come with CRM2; Matsumoto figures that new advisors will be especially hurt as dealers look to pass along costs.

“Everyone is afraid of speaking out because the regulators have the power to bog you down with extremely expensive reviews and processes to use up one's time and reputation. It can put you out of business.”

Matsumoto’s speaking to the idea that the mutual fund business is currently over-regulated and CRM2 will only make it worse. It does little for the average investor and their advisors because it ensures that the dealership structure remains intact.

“The dealers have to exist because of regulations and costs of compliance that make small dealerships economically unviable,” says Matsumoto. “If you just want to sell funds to clients, I am not sure what significant value dealerships bring to the table other than they are required by regulators and help with compliance.”

But it’s not just mutual fund dealers who are suffering under the strain of increased compliance costs. IIROC firms are also experiencing difficulties when it comes to remaining compliant.

In February Burlington-based securities firm yourCFO sold up to the Investment Planning Counsel citing higher compliance costs and increased competition from the banks.

“Bank- and insurance-owned dealers have the resources to provide both high payouts and recruitment bonuses to advisers," former yourCFO president Doug Leyland told the Globe and Mail at the time of the acquisition. "They can run the dealer at break-even because they know their advisors will sell their proprietary products to their clients and that's where the serious money is made. I ran a truly independent dealer in that my firm did not manufacture its own investment products. Those days are done."

When you have a branch network like the banks have it’s much easier to digest the increased compliance costs that come with CRM2 without affecting payouts. Unfortunately, as Matsumoto points out, that isn’t the case for many of the mutual fund dealers, who will simply pass along those costs putting downward pressure on advisor payouts.
Be prepared to take home less come July 2016.