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Proposed reforms to many of the rules that govern client-advisor relationships will  transform the retail investment business fundamentally, put pressure on advisors’ pay and may force smaller firms out of business, warns a letter from Ian Russell, president and CEO, Investment Industry Association of Canada (IIAC).

Russell’s letter outlines the IIAC’s initial assessment of a set of sweeping reforms proposed by the Canadian Securities Administrators (CSA) in late June.

Although the proposals avoided the introduction of a statutory best interest standard, the CSA unveiled plans to incorporate best interest principles into various aspects of their rules, such as suitability, know your client and conflicts of interest rules. It also announced plans to outlaw deferred sales charge (DSC) mutual funds and to limit discount brokerages from receiving trailer fees, but not to ban embedded fees outright.

The proposed reforms will nevertheless change existing industry practices, Russell states in his letter.

For example, under the rules envisaged by the CSA, “It will be difficult to justify recommending a mutual fund with an embedded fee or trailer if alternative up-front low cost alternative investments exist in the marketplace,” Russell states.

At the same time, “advisor fees and charges will be under pressure from the ongoing transparency requirements under CRM2 and the increased availability of lower commission paying products. The mutual fund distributors more reliant on embedded fee mutual funds will be forced through the more stringent suitability and conflict requirements, into alternative lower fee-paying products.”

This expected pressure on revenue, coupled with higher compliance costs, will cut into firms’ operating margins. States Russell: “It will push more firms into amalgamation and merger, or in certain cases, a decision to close operations.”

These same forces will also impact advisors’ compensation. “Firms will also be putting pressure on advisor pay-outs to cover the increased operating costs of the advisory business,” Russell states.

Given the expected impacts, the IIAC will be active in lobbying the regulators and proposing alternatives to some of these reforms.

“It is reassuring the regulators have telegraphed a willingness to listen carefully to public comment and be open to constructive suggestions to achieve the best possible rule framework,” Russell states,  noting that the proposals are out for comment until Oct. 19.