Three big Canadian banks’ moves to squeeze out third-party funds for retail advice clients has provoked strong reactions
A move by some of Canada’s Big Six banks to make product shelves at their retail advice businesses proprietary-only has been panned as a blow to investors.
The moves have come as the deadline for the second phase of the Canadian Securities Administrators’ (CSA) client-focused reforms approaches. Among other provisions, the second part of the CFRs includes know-your-product rules requiring investment advisors to “take reasonable steps to understand the securities that they purchase, sell or recommend to a client … to make a suitability determination.”
In emailed statements and interviews with news outlets, CIBC, TD, and RBC said removing third-party funds would create a simpler product shelf that would allow their retail branch advisors to focus more on advice and better comply with the CFRs through deep product knowledge. They added that pre-existing holdings of third-party funds within retail clients’ portfolios, including for accounts that are being transferred in, will not be affected.
Still, not everyone is convinced. Jason Pereira, a senior financial planner and portfolio manager at Woodgate Financial in Ontario, said that while most in the industry did expect shorter shelves as a consequence of the CFRs, the banks’ move was particularly extreme.
“There's a big difference between offering 30,000 fund codes and offering nothing but your own,” Pereira said in an interview with Wealth Professional.
He recalled that during the 2000s, banks specifically worked to include third-party funds into their branches in order to compete with independent firms. But as the years wore on, bank branch clients’ portfolios drifted away from third-party funds, which Pereira attributed to quotas and other incentives that were put in place to skew sales toward in-house products.
Echoing Pereira’s points, Jean-Paul Bureaud, executive director at pro-investor group FAIR Canada, said he was surprised at the banks’ decision to move their branch advice product shelves entirely in-house, arguing that they had the financial capacity to go another way.
“It’s one thing to say in a CSA comment letter that the client-focused reforms could lead some institutions to shrink their product shelves to save on compliance costs,” he said in an email to WP. “It’s another thing entirely when three of Canada’s largest financial institutions decide to do it to save a few pennies.”
The CFRs do make allowances for some firms that offer a third-party-only shelf of products. To offset the potential suitability issues that could arise from those models, the reforms include other provisions, such as one that requires firms to compare and make sure their offerings are competitive against alternatives available in the market.
But according to Pereira, there’s still room for proprietary-only firms to potentially get around that. “Past performance is not future performance. That is a truth, but also the out on this,” he said. “Just because one manager they had in-house underperformed, it doesn’t mean they’re not going to perform in the future.”
He also emphasized that fundamentally, no one provider can guarantee to have the lowest-cost fund or ETF for any sector of the economy, or that they have the best-performing manager in any given sector of the economy.
For his part, Bureaud expressed concerns that by squeezing out other funds from their retail distribution channels, banks are reducing competition and choice as they reassert their already-dominant position in the investment markets.
Another provision within the CFRs that could help investors, he said, holds that conflicts of interest should be resolved in the best interest of the client. But as long as the industry is structured the way it is – with industry registrants being regulated and organized based on the products they sell – he said investors can never be sure their interests will be prioritized.
“The real question to ask is: is it too much to expect that someone selling you mutual funds should understand what they are selling?” Bureaud said. “The CFRs made this expectation clear. And is it too much to ask that they sell you the most suitable mutual fund available? Are investors wrong to expect this?”