Potential conflicts of interest in compensating representatives discovered

A review of compensation and incentive packages conducted by the CSA outlines possible conflicts of interest

A recent review by the CSA has outlined potential conflicts of interest in methods large financial institutions use to compensate retail representatives.

The report is titled CSA Staff Notice 33-318: Review of Practices Firms Use to Compensate and Provide Incentives to their Representatives. The notice presents findings of a 2014 survey focusing on incentive practices used by large financial institutions for retail representatives that serve clients in the MFDA and IIROC channels, as well as high-net-worth clients in the portfolio manager channel.

The survey found a wide range of practices used by firms to compensate agents, including direct tools such as commissions, performance reviews, and sales targets; and indirect tools such as promotions and valuation of representatives’ books of business for miscellaneous purposes.

The notice highlighted several schemes that could result in conflicts of interest between clients and registrants. Examples of those include:
  • Referral arrangements – certain firms offer one-time or ongoing payments to representatives who pass on business to related or outside providers, which could encourage representatives to recommend products or services to existing clients who don’t need them;
  • Compensation or titles tied to sales or revenue – offering rewards based on sales or earnings may encourage representatives to sell products without considering their suitability for clients;
  • Incentives to favor certain products – agents may be driven to sell proprietary or other preferred products to maximize the firm’s profits, which could compromise the quality of advice given and the favorability toward clients of investment outcomes;
  • Investment amount incentives – tying compensation to the amount of investment or savings a client registers in his account may encourage representatives to recommend higher amounts regardless of potential financial harm to clients;
  • Cross-selling incentives – rewarding agents for reaching certain product mix targets may also encourage them to make non-essential or sub-optimal investment recommendations
  • Accelerator (stepped payments) – Giving higher payout rates for achieving sales or revenues within a certain time may push representatives to push for investments that are timed to their benefit rather than to their clients’.
The complete notice includes more than twenty other incentive schemes, along with any potential associated conflicts. In light of ongoing work to enhance the client-registrant relationship, the CSA may issue additional guidance or proposed regulation relating to compensation and incentives.

Related stories:
Are most financial advisors just salespeople?
New guidance for portfolio manager-dealer member arrangements released