MENU

Regulators should rethink proposal to restrict referrals

By Susan Yellin | November 29 2018 09:30AM

Photo: Freepik

The Canadian Securities Administrators (CSA) need to go back to the drawing board and rethink their ideas on restricting referral arrangements, says the head of national sales for Franklin Templeton.

Dennis Tew told the Advocis Symposium in late November that the CSA’s proposed new restrictions on referral arrangements aren’t in keeping with the regulators’ original reason for allowing the referral process.

“A prohibition defeats the entire purpose of trying to provide clients with access to the services that they need,” said Tew.

Client Focused Reforms

His comments refer to major changes to the referral arrangement system outlined in the Client Focused Reforms proposals.

The proposed amendments are expected to add compliance obligations on advisors in the areas of suitability, such as know your client and know your product responsibilities, disclosure to clients and conflicts of interest, including referral arrangements.

While registrants would be able to continue to receive referrals from non-registrants, referral payments – basically finder’s fee arrangements – would only be made to registered advisors.

As well, the new referral proposal states the referral arrangements cannot last longer than three years and has made stipulations as to how much a person can receive for their referrals. There would be a three-year transition period to deal with compliance issues for existing referral arrangements, while new referral arrangements would be subject to the new rules immediately.

Not commercially appropriate

Tew said the proposals look at alternative ways to attract new clients for firms that depend on referral fees, but added he didn’t believe they were “commercially appropriate.”

Tew said Franklin Templeton has a discretionary high net worth business that depends on referrals and direct clients coming to them from both registrants and non-registrants.  “To think that we would be put in a position now of going out and marketing and trying to steal clients from other advisors across the country to provide our services doesn’t make any sense to us and wouldn’t be commercially viable for us.”

He said when his company signs a referral arrangement with either a registrant or non-registrant it makes sure the appropriate processes are in place.

Tew added that there needs to be a more fulsome industry discussion about the Client Focused Reforms before moving ahead on anything.

Debra Foubert, director, compliance and registrant registration with the Ontario Securities Commission (OSC), told the symposium that currently, some of the referral arrangements last as long as the client and advisor are working together.

In the past, advisors who had left the industry could maintain a long-term fee of upwards of 80% of the management fee, she said.

Neil Gross, president of Component Strategic Consulting and chair of the OSC’s Investor Advisory Panel, said that regulators are out in front of this issue.

But Gross also added that there seems to be an almost unanimous view in the industry that this part of the proposals requires more thought.

Will lead to greater innovation

Meanwhile, Foubert said the CSA’s proposals to deal with major retail investor protection issues as well as the Client Focused Reforms will lead to greater innovation in the industry.

For the most part, the Client Focused Proposals should make it easier for advisors to compare and offer products based on characteristics like client knowledge.

“Competition will drive innovation, we know that,” said Foubert. 

Gross said many advisors don’t have the time to undertake due diligence on every product that comes into the market. He added that advisors also don’t need to have detailed knowledge of every product out there. However, he said, they do need to have the proficiency to know how these products compare with similar offerings in the market.

Deferred sales charges

When it came to the CSA’s stand on deferred sales charges, Foubert said both the Mutual Fund Dealers Association (MFDA) and the Ombudsman for Banking Services and Investments (OBSI) still receive complaints about DSCs from investors despite a major drop in the number of the investments.

“While there is a trend to eliminate DSCs it doesn’t appear to be going fast enough for clients impacted by it currently.”

Tew said natural evolution has changed the nature and number of DSCs in the industry. He pointed out that at one time, 98% of Franklin Templeton’s business was in DSCs, but that quickly evolved into no-load and low-load products. As a result, DSCs at Franklin Templeton are now at about 8%-12% of all sales.

But Tew said DSCs can still be the right investment for some clients and advisors.

“It can be a solution. It can fit suitability requirements and I think rather than an outright ban on it regulators should have looked at DSC on a suitability basis. It’s probably not for an 80-year-old [investor] but for young professional advisors trying to get a business going, for those trying to give support to their clients, I think it can be a suitable investment.

Back in September, Ontario Finance Minister Vic Fedeli openly disagreed with the proposed ban on DSCs on mutual funds and on the payment of trailer fees to discount brokerages.

Foubert said the OSC is actively working with the ministry to understand its position in the matter.

“The support of the minister is very important to the OSC,” she said.

Advertisement
Related to the same topic …