Choices

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   By Guest Blogger Ryan Lewenza

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There’s something brewing with the big Canadian banks that investors should be aware of. In my opinion, it’s not good for clients and investors as a whole.

The Canadian Securities Administrators (CSA), which is an umbrella organization of the various provincial and territorial securities regulators, is putting into effect new regulations – known as the client-focused reforms (CFRs) – by the end of this year. These reforms include changes to a key regulation, called “know-your-product” or KYP rule, which is at the heart of the recent changes at some Canadian banks.

Essentially this KYP rule is to ensure that financial planners and advisors like ourselves need to know and understand the products we are investing clients in. It’s a pretty straight forward, intuitive and reasonable regulation that requires investment professionals to do their job, and analyze and understand the products they are offering to clients.

Well, some of the Canadian banks including TD, Royal Bank and CIBC, are using these new regulations to make sweeping changes to their financial planning divisions, where they will no longer offer third-party mutual funds and investment products to their clients.

What this means is that these financial planners will only be investing their client portfolios in their own, in-house investment products. So the investment decisions will not necessarily be based on what’s best for the client. For example, the investment decisions will not be about which funds have the lowest fees or the best long-term performance. They will be restricted to just the firms in-house, proprietary products, so choice is getting severely restricted.

The banks are saying these decisions will reduce risk and result in better outcomes for clients. This is debatable. My take is that these banks are using these regulatory changes as an excuse to now only offer proprietary products, where they earn higher fees.

These decisions and changes in strategy has prompted some response from regulators. Mutual fund companies have voiced their concerns and the head of the CSA, Louis Morisset, has recently stated his concerns at an investment conference, which was then picked up in a Globe & Mail article. The quote reads:

“I can assure you that this is not an appropriate result and we will make sure that things unfold in the right way,” Mr. Morisset told the virtual audience during a question period at the Investment Funds Institute of Canada’s annual conference. “The reforms are there to increase professionalism in registrants and give them more in terms of tools to do a better job with their clients. If that boils down to reducing what they can sell, then we have a big problem.”

So what’s the point of this?

First, investors should be aware of this important change, which will reduce their investment choices and potentially impact future performance.

Second, as we always advocate, stick with ETFs since there are hundreds of different ETF companies to choose from globally, and over 40 different ETF companies in Canada. We deal with a number of the top ETF companies like iShares/RBC, Vanguard, BMO and Fidelity. Why limit yourself to just one option?

Third, always invest in Canadian bank shares (we prefer through a broad-based ETF) since they focus a lot on the bottom line and deliver great earnings growth.

Lastly, if you have a financial advisor, ensure they are always acting in your best interests by adhering to KYP rules, completing their due diligence on the recommended investments, and investing in the leading investment firms, with our preference being ETF companies.

I’m going to be very interested to see how this all plays out in the coming months. Stay tuned!

Current List of All Canadian ETF Companies and AUM

Source: National Bank, ETF Research & Strategy

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Vice President, Private Client Group, of Raymond James Ltd.