Truly independent, client-first advice remains the exception, not the rule.Inside Creative House/AFP/Getty Images
A recently published regulatory review of sales practices at Canada’s Big Five banks found that pressure on mutual fund advisors to meet sales targets can lead to products being offered that aren’t in the clients’ best interests.
It’s now a well-documented topic: investors are receiving conflicting advice from banks, at which employees are incentivized heavily to sell certain products that benefit the bank’s shareholders. Achieving sales goals and other referral targets is key to a successful career working for a Canadian bank.
That’s not to say there aren’t many fine people working at Canadian banks, providing fine advice to their clients. However, they’re doing that fine work despite their environment, not because of it. There’s another cohort of employees who don’t know better or understand that there’s an alternative - and they’re being indoctrinated into the way of the bank.
In response to the regulatory review, there has been typical bank-bashing across the financial services industry, with many holding themselves out as independent financial advisors, touting their delight over this “shocking” news. How crowded is the higher ground? Is it really better in the “independent” advice world? The short answer is no.
Advisors who work at a company that manufactures investment products are in a similar position to bank employees - or arguably worse, given they’re often perceived as independent when they’re not. Historically, many product manufacturers have offered explicit incentives to promote their own products. That has been modified under the client-focused reforms introduced in 2021 – and that’s progress. But pressures still exist. Platform availability, shelf space, internal recognition and firm-level business targets still steer behaviour and overall compensation packages.
As with bank employees, there are independent-minded advisors who consistently put their clients first. But here’s the harder truth: many advisors don’t even see the conflict because they were trained inside a system that normalized it. It’s like growing up in a town where the water has a strange aftertaste, but you never notice until tasting clean water somewhere else. For advisors who’ve never experienced another standard, it’s hard to recognize what’s missing.
That’s why truly independent, client-first advice remains the exception, not the rule.
The most insidious conflict is the access that affiliated businesses get to advisors. If a firm is owned by or affiliated with a product manufacturer, advisors are bombarded with constant information and sales pitches. It’s certainly easier to take the firehose of proprietary information aimed at advisors and use it as “research” to place products with clients.
A recent example is the Ontario Securities Commission’s order to liquidate the funds offered by exchange-traded fund provider Emerge Canada Inc. Roughly 25 per cent of the assets in those funds came from advisors at Wellington-Altus Private Wealth Inc., which is an unusually high concentration for a single firm. It might seem odd until you learn that Charlie Spiring, the firm’s founder and then-chief executive officer, personally owned one-third of U.S. affiliate Emerge Capital Management Inc. This ownership wasn’t widely known among the company’s own advisors or its clients, The Globe reported.
According to the article, Mr. Spiring promoted Emerge funds to Wellington-Altus advisors, and several of the funds were included in the company’s proprietary managed investment portfolios and separately managed accounts. What appeared to be a strong endorsement from “independent” advisors ultimately proved to be a case of conflicted incentives and poor outcomes, including frozen client funds. That’s exactly the kind of behind-the-scenes conflict that undermines trust.
Here’s another example of a conflict that exists today: One of the challenges of being an advisor is recognizing when a client’s desire to hold cash is a sound strategy and when it’s driven by fear or uncertainty. Sometimes, holding cash is absolutely the right call. At other times, it reflects an emotional need that may be at odds with the client’s long-term best interests. Good advisors know the difference. And when appropriate, they view it as an opportunity to help clients gradually build the confidence to invest that money in a way that aligns with their goals.
Unfortunately, many advisors don’t approach it that way. They see client cash as lost revenue. Mutual fund wholesalers who sell mutual funds and similar products to “independent” advisors make many pitches.
An example is money market funds such BMO Global Asset Management Inc.’s BMO Money Market Fund Advisor Series, which was recently marketed to advisors as a cash-equivalent solution. On the surface, it appears to be a low-risk place to park money. In practice, it pays advisors an ongoing trailing commission — about 0.20 per cent annually — from client assets. This isn’t meant to single out BMO GAM; almost every fund provider has a product like this one.
As most independent advisors earn nothing when clients hold their assets in cash, this structure creates a clear incentive: recommend the fund and collect a fee. Does it benefit the client? Possibly. Does it benefit the advisor and BMO GAM? Absolutely. Ultimately, independent advisors can be just as much like the bank employees they criticize.
Let’s not pretend that there exists some vast, higher moral ground called “independent advice” in which clients can go and get unbiased recommendations.
The bottom line: As long as an advisor works with a product manufacturer or can improve this month’s paycheque based on what they can get a client to do, they’re still providing conflicted advice.
Colin White is chief executive officer and portfolio manager of Verecan Capital Management Inc. in Halifax.