compliance puzzle

In the last 10 years or so, we have witnessed the further democratization of capital markets, as a second massive wave of Canadians has entered the space.

Canadians seeking higher yields in the stock market by investing through newly popular mutual funds drove the first wave in the early 1990s. The second wave is driven by the baby boomer demographic, as Canadians invest more savings into capital markets to build personal retirement funds to compensate for less generous — or non-existent — work pensions, and to pay for lifestyle choices or expectations.

Many Canadians fall into what is termed the “affluent mass market” category, with individual liquid assets available for market investments in amounts between $100,000-$500,000. Based on data compiled by Strategic Insight, roughly 1.8 million Canadian households fell into the affluent mass market category in 2015, in turn comprising over $400 billion in investable assets. The average account size in Canada during that time period was $180,000. Market evidence suggests the needs of Canadians in the affluent mass market are similar to — if not greater than — those of wealthier Canadians. These include a robust selection of investment products and good advice, as well as tools to guide and explain investment decisions and help build a financial plan for their retirement.

While we’ve witnessed this large influx of Canadians seeking market investments, we’ve also seen the introduction of regulatory reforms designed to safeguard and protect investors. These reforms have been massive in breadth and significance. Total operating expenditures for investment dealers totaled $9.2 billion in 2018, up 18% from the level four years earlier, based on figures from the IIROC Monthly Financial Reports. This cost increase is a good proxy for mutual fund dealers subject to similar compliance requirements. The ratcheting up in compliance costs in the wealth management industry has occurred across the broad client base as new rules, guidance and policies, including initiatives such as the Client Relationship Model (“CRM”), apply to large and small investors.

Investment dealers and mutual fund dealers continually assess the breadth and composition of their wealth platforms in various respects, including product shelf, financial planning and online advice — and, where available, discount services — to serve their clients effectively. Notwithstanding, the costs brought on by reforms for business models that provide investment advice through an advisor or portfolio manager may have a proportionately larger negative effect on the affluent mass market client base than high net worth clients. The result is that this model, on a relative basis, may become less available to the many Canadians who are smaller or affluent mass market investors. The challenge for firms catering to these clients is to align the underlying economics that have been unintentionally weakened through regulatory reforms with the broadly based financial needs of clients.

While well-intentioned, in addition to being expensive to implement and manage, these reforms have generally been layered onto a wider regulatory system that has not been sufficiently scrutinized as a whole for its efficiency and effectiveness in the quickly evolving technological era. As in other areas, technology has impacted the investment industry in multiple ways, including the availability of investment strategies and products.

The efforts of the Ontario Securities Commission (OSC) Burden Reduction Task Force to streamline regulation, improve operational efficiencies and lower the regulatory burden are well-timed. If successful, they should have a significant impact on reducing compliance costs, improving the business economics to serve smaller investors and giving more room for firms to build out more robust wealth platforms with good advice options for all investors. A good result would be that investors in the affluent mass market category have more choices and chances to fulfil their financial objectives.

Ian Russell is president and CEO of the Investment Industry Association and Laura Paglia is an incorporated partner at BLG LLP.