More stringent rules around suitability mitigates the need to ban embedded commissions, according to the Investment Industry Association of Canada.
President and CEO Ian Russell sat down with Wealth Professional to discuss the changing landscape of the industry and the proposed regulatory changes from the Canadian Securities Administrators.
In part one, he addresses the divisive issue of trailer fees – the annual payment to advisors from mutual fund companies - and why he supports the CSA’s decision not to pursue a ban.
Russell believes that stricter rules around know your client mean advisors will be obligated to present the “little guy” with alternatives from the plethora of new, low-cost alternatives rather than lose to them to robos. This, he said, reduces the need for a ban.
He said suitability obligations, which are more detailed, bring into account cost, and the advisor will have to make the client aware of alternatives at the same price or cheaper.
He added that in comparison to a mutual fund product, an advisor can now present a smaller investor with a similar fund or ETF that’s at 50 or 100 basis points upfront, with maybe a trailer that’s less than 1%.
“By the same token,” he said, “and this is where it gets a little complex, there is this mutual fund out there which has a big trailer on it but the track record is really good and it pays a great return. So the advisor has to take a number of factors into account. One is the performance of the fund, historical performance, consistency and high performance, which would influence whether you would recommend it or not.
“And then there is the wherewithal of the client. If it is a very small client you would say, well, we’ve got to get you into an ETF or a mutual fund that’s still actively managed and still providing a decent return this much cheaper.”
Russell believes the options now on offer, and the pace of innovation, has caused the CSA to opt for evolution not revolution, with the transparency and cost disclosure of the new products starting to address the age-old issue of conflict of interest.
Russell said: “The market itself is in the process of change. You just have to look at the products that have come on to the market – Vanguard mutual funds, for example. So there are new products and the ETF market is burgeoning; it’s not right for everybody and there are pitfalls everywhere but there are more and more type of products.
“A combination of more stringent rules coupled with a continually innovating market place has led the regulators at this point to say we don’t need to ban embedded commissions, it will sort itself, and the abuses will sort themselves out.”
Wealth firm plans major Ontario expansion
The cost of divorce: how advisors can protect assets
More market talk: