There’s an awful lot of noise being generated around the investment industry in Canada. It’s as if everyone agrees that, somehow, the system is broken, but no one can quite agree on what the problem is, or how to fix it. Unfortunately, in my view, the anger is often misdirected, and in the absence of a clear understanding of what’s broken, it’s hard to imagine that a fix will happen any time soon.
To try and maybe clear the air a little, I’d like to offer my take on what I think is the point of failure, based on my many years of experience in the industry. Hopefully, we can figure out both the challenges and opportunities that exist, and eventually work toward an industry that works for all.
So here is my view of Canada’s investment industry, looking from the inside, out.
A Background On The Structure Of The Industry
The investment industry in Canada is broken down into two teams, in a way. Team #1 are brokers, who are licensed under the Investment Industry Regulatory Organization of Canada (IIROC). Brokers are licensed to sell stocks, bonds, and Exchange Traded Funds (ETFs), as well as mutual funds. They can also have add-on licensing that allows them to sell more sophisticated securities such as options. They generally work for either bank-owned or independent brokerages, and frequently have a financial planning designation (PFP, CFP, etc.) as well.
Team #2 are advisors who are licensed under the Mutual Fund Dealers Association of Canada (MFDA). MFDA-licensed advisors are able to sell mutual funds only, not stocks, or bonds. They may sell ETFs if they meet certain proficiency requirements, but that is a more recent development and most MFDA-licensed firms lack the necessary trading platform to transact in these products. These advisors sometimes have a financial planning designation, and they are most often found in Canada’s banks. They are also present in independent firms such as Investor’s Group and Primerica.
Although I have worked for both IIROC and MFDA firms, this article will largely discuss the MFDA business as it seems to be the side that generates the most complaints, appears to have the most problems, and is the business I know best.
Keep in mind as well that I left the business two years ago, so some things may have changed in the time that has passed.
The Road To Hell Is Paved With Good Intentions
One area where the banks have offered a good deal to Canadians is in making advisors available to people of even modest means.
If you walk into an IIROC-licensed brokerage in any major market in Canada (particularly a bank-owned brokerage) you’ll probably be hard pressed to have a conversation with anyone unless you have at a bare minimum $500,000 to invest. The pressure on brokers to cater to wealthier clients is highlighted by a certain bank-owned brokerage that not too long ago axed any advisor who wasn’t generating at least $650,000 in fee-based revenue. Brokers generally have no time or appetite for the small investor.
Enter Canada’s banks, who have an MFDA-licensed advisor available to help just about any size investor, even if you are starting from $0. The banks even provide accredited financial planners, usually for families that have in the neighborhood of $100,000 or more to invest. As far as democratizing advice and making it widely available, the banks have done a pretty good job.
Unfortunately, this is pretty much where the good news ends. The banks have allowed their dominance of this market to lead to some very bad habits.
Not All Bank Employees Are Equal: Salespeople
One of the challenges of the bank model is that it can be hard to know who, exactly, you are talking to in the bank. The most common employee who may talk to you about investments is the general salesperson. They often go by titles such as Financial Services Manager or Financial Advisor, but often these are folks who were tellers a few months ago. The only licensing they usually have is a license to sell mutual funds, which is obtained by completing a short course, followed by a 100-question, multiple-choice exam that they need to score at least 60% on. After that is completed, they receive another 90 days of on-the-job training and supervision.
In addition to investments, these salespeople are also tasked with selling bank accounts, credit cards, term deposits, and sometimes mortgages.
Needless to say, these folks are often not well equipped to do much on the investment side of things except take instructions from a client. Any advice they give is very likely to be a generic talking point that was passed on to them from the institution they work for, that they may or may not understand.
These salespeople are often under intense pressure to sell product. At one institution I worked for, the branch manager was mandated to sit down with each salesperson three times a day:
- once in the morning to talk about their appointments and what they planned to achieve that morning;
- once at noon to see if they met their morning sales objective and talk about their objectives for the afternoon; and
- a final time at the end of the day to see if the afternoon objective was met.
This type of intense scrutiny goes beyond micromanagement and is dangerously close to simply being insane. All sales made by the salespeople are closely tracked, and salespeople, sometimes from across the country, are compared against each other based on the volume of sales made. And look out if you happen to be hovering near the bottom of those lists!
Sales performance is also used to determine year-end bonuses and, in many cases, eligibility for promotions.
Bank-Based Financial Planners
The in-bank financial planners represent a step up from the salespeople. More often than not, the term “Financial Planner” is in their job title, and these days they almost always have to have a financial planning designation to be in this role. That designation is typically either the CFP (Certified Financial Planner) or PFP (Personal Financial Planner).
The good news is these folks have the extra training and can often do a reasonable or even good job of financial planning, if they so choose. The bad news is that the sales pressure experienced by the other bank staff is applied equally, if not more so, to the planning team. Financial Planners are also either base-plus-commission employees, or commission only.
My experience is that the banks put very little emphasis on completing quality financial plans (although some planners do this anyway) and see the financial plan as a way to get information out of the client, and provide up front value that will then make the client feel obligated to invest with the advisor. Quality control, when it is done at all, is at most a spot check of a couple of plans that were done in the previous quarter. Often the planner is told which plans will be looked at in advance, in case any cleaning up is needed.
In one audit of my financial plans, my supervisor, who was conducting the audit, confided that he had never completed a financial plan himself, and that I would have to ‘tell him what he was looking at’.
Where It All Falls Apart: The Sales Process
When you are a bank employee, the bank makes no bones about the fact that everything, at the end of the day, is about the bottom line. And nowhere is that clearer than in the sales process. Without giving away any corporate secrets, and based on my own experiences, here’s a rough idea of how commissions tend to work for many bank-based financial planners:
- Assets that are “new to the bank”, which usually means on deposit less than six months or a year, generate regular commissions, whereas assets that have been on deposit longer generate as little as 5% of the commission.
- Selling certain products, such as wrap accounts, portfolio solutions, or select funds targeted by the institution, can boost commissions by 60% or more.
- Index funds can generate commissions that are as little as 10% of the regular commission amount.
- Selling non-bank funds is either prohibited, or done at drastically reduced commission rates.
- Guaranteed Investment Certificates (or Term Deposits) generate a fraction of the commission of mutual funds.
- Stock-market-linked GICs generate a bonus over and above the regular GIC commission amount.
It’s easy to see how a structure like this can drive perverse behaviors. The push is on to sell mutual funds over GICs, high-fee wrap products over “stand-alone” funds, bank funds over funds from other manufacturers, and no one ever, ever, sells an index fund.
Further, existing clients are often ignored in favor of chasing new assets. I even knew planners who recommended clients transfer assets to another institution, then write a cheque for an investment purchase, so that the assets would be commissioned as “new” and qualify for the much higher payout.
These numbers didn’t just impact commissions. Planners have sales targets that have to be made as well, and the penalty for missing them consistently is often termination. An index fund that generates only 10% of the commission, may also generate only 10% of the credit to your sales target. So a $100,000 investment sale is only credited as $10,000. In many cases, any planner who consistently sells cheap index funds will first starve to death, and then be fired.
And the termination threat is very real. I don’t think I ever worked on a team that had more than 20 people on it, yet every year at least one or two would either be let go, or would jump just prior to being pushed.
This is only the tip of the perverse-sales-process iceberg. There simply isn’t enough time or space to delineate all the ways that numbers, sales, and clients are twisted and manipulated to conform to questionable corporate mandates.
Do MFDA Advisors Really Believe In What They Are Selling?
This is a question I have been asked a number of times, and it’s hard to answer. Certainly, for mutual-fund focused businesses, low-cost ETFs are seen as an absolute threat. And a lot of effort is put into countering that threat through “educating” the sales teams.
Over the years, I have been subject to plenty of training on:
- The purported benefits of active management.
- Why passive investing can’t possibly match the benefits of actively-traded funds.
- How mutual fund fees (often well in excess of 2%) are providing value to clients by providing an avenue to obtain valuable planning services.
- Why selling bank funds is superior to selling funds from non-bank manufacturers.
For advisors who spend years being subjected to this, it’s hard not to absorb it to a degree. And it’s often seen as critical information in order to maintain your selling advantage in the face of competition from other firms, and an increasingly skeptical public.
Deep down, I think most advisors know fees are an issue. They saw it in all the hand-wringing over the CRM2 disclosure guidelines. However, there is simply no benefit in even acknowledging it because it doesn’t fit the narrative of the corporations they are working for. Trying to push the low-fee narrative will only land you in hot water for not aligning yourself with “the team”.
Why Don’t Regulators Do Something?
So, with all this going on that’s clearly not in the interests of investors, surely the regulators will step in and clean house, right?
Don’t bet on it. Both the MFDA and IIROC are what’s known as “self regulatory” organizations. In other words, they are set up by the industry, to regulate the industry.
Let’s look at the MFDA. According to their 2018 Annual Report, the MFDA took in $35-million in revenue. Where did that money come from? It came from the member firms. Where did it mostly go? Well, $26-million went to salaries. Do you really think a bunch of people who are collecting nice paycheques from the industry are going to be really enthusiastic about biting the hand that feeds them? Probably not.
Further, about half of the board of directors of the MFDA are representatives of the member firms. Again, how likely are they to crack down and clean up? I’m guessing not very.
So What’s The Solution?
We’ve come to the point where the industry, both on the IIROC side and the MFDA side, really needs transformative change to once again focus on the client. Too often, writers and commentators are quick to place the blame at the feet of bad advisors, but as can be seen from the above, bad advisors are really a symptom of bad institutions.
The advisors, to a large degree, simply work in an environment where they have no autonomy, no authority, and no voice in how the business is run. Most bank-based financial planners are given a document to sign at the start of each new fiscal year. That document is the compensation plan and sales targets that will apply to you, as a planner, for the year ahead. Your options often are, literally, sign it or leave. No discussion. No negotiation.
In order for change to happen, it has to come, not from the employees, nor from the self-regulatory organizations. It would have to come from the federal or provincial governments, via the securities commissions.
I would humbly recommend that a great first step would be to do the following:
- An outright ban on any compensation structure that encourages the sale of one product, or one particular manufacturer’s product, over another. All advisors should be free to recommend a product that they feel is in the best interests of the client in front of them, without worrying about impacts to their paycheque, or longevity in their job.
- Further, MFDA-licensed firms have the ability to sell ETFs, so they should train their employees appropriately and get the necessary infrastructure in place to do so.
- Lastly, anyone advising on investments should be trained to accept that they are advisors first. Not salespeople. That means the needs and interests of the client must be paramount. Further, all advisors, not just financial planners, should be subject to ongoing continuing education requirements.
The reality is that the lion’s share of advisors in Canada work for either one of the Big Six banks, or one of the brokerages that they own. If you change the practices of these six companies, you will have almost instantly changed the industry. That should be the focus of everyone who wants to see the industry do better.
Failing that, the one thing these institutions love more than anything else is their profits. If you want to push for change, either move your assets to a self-directed platform (my favorite is Questrade, which I use myself), or find an independent, fee-based advisor who will take you on.
If enough people vote with their feet, and their assets, maybe the Big Six banks will be forced to change sooner, rather than later.
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I am an accredited Financial Planner with 23 years of experience in the financial services industry. During the course of my career I completed hundreds of financial plans and recommended and sold hundreds of millions of dollars of investment products. I believe that financial independence is a goal anyone can aspire to and I am passionate about helping others to live life on their own terms.