Despite the Canadian Investment Regulatory Organization’s (CIRO) proposed model for advisor incorporation, which could broaden investment dealer advisors’ access to incorporation, advisors licensed to sell mutual funds remain hesitant to move to an investment dealer platform.
“There’s no sense in moving from one category to another if there’s only going to be one category going forward,” said Chris Enright, executive vice-president and co-head of wealth at CI Financial. “Everybody’s pausing to see where this lands.”
Under current rules, mutual fund dealing representatives outside Alberta can generally have compensation paid to a corporation through a directed commission arrangement. Certain mutual funds-only representatives at dual-registered firms can do the same.
Investment dealer reps don’t have the same option. A mutual fund dealing rep who receives compensation through a corporation and moves to an investment dealer can lose the ability to receive securities-related dealer compensation through that corporation.
At IG Wealth Management, that has become one of the main brakes on advisor transitions, said Annamaria Testiani, head of strategy, advisor and client experience.
An incorporated mutual fund advisor contemplating an upgrade can face a higher tax burden, Testiani said.
“For a lot of these advisors, it’s fiscally irresponsible to move their practice because they’re leaving a lot of money on the table.”
Jack Mastromattei, president of Sun Life Canada Securities, likewise described incorporation as the biggest hurdle for advisors considering the switch.
Sun Life advisors who have made the transition to broader securities registration generally haven’t been incorporated, Mastromattei said. That includes advisors in Alberta, where mutual fund representatives can’t use directed commission arrangements.
CIRO’s proposed incorporated approved person model is intended to remove the disparity between reps at mutual fund and investment dealers.
Until that framework is finalized, however, incorporated mutual fund advisors have an incentive to wait.
Onerous repapering
In addition to incorporation, moving a book of business to another platform can create a compliance burden.
In a typical transition, advisors may have to contact clients individually, explain the changes and obtain authorization to move their accounts to the new platform, Enright said.
At IG, about 50 teams transition from the firm’s mutual fund business to its broader investment platform each year, Testiani said. IG now has about 300 securities-licensed advisors and roughly 3,000 mutual fund-only representatives.
Advisors usually make the move so they can offer more services and attract or retain higher-net-worth clients. But transferring a large book and completing the necessary client documentation takes time.
A younger advisor with 100 clients might complete a transition in a month, while a larger practice could take much longer, Testiani said. “Do you want to not produce for six months just because you want to move your book over? That’s a big risk.”
The lengthy transition is less attractive for advisors nearing retirement. A younger advisor who has just purchased a book, however, may already be contacting and onboarding clients, creating a natural opportunity to upgrade, Testiani added.
“You want to be thoughtful of when you transition because you’re disrupting the client.”
Sun Life, which operates separate mutual fund and investment dealers, has tried to minimize that friction by making compliance processes at the two firms as similar as possible, Mastromattei said. “We didn’t want a very different KYC process at one dealer versus the other because it would make movement that much more difficult.”
In a separate move, CIRO proposed retiring its dual-registration regime in February. The changes would allow an investment dealer to operate a mutual fund division without also registering as a mutual fund dealer, and would eliminate the requirement that mutual fund-only advisors upgrade their proficiency simply because they work at an investment dealer.
Once the major barriers are removed, Mastromattei expects more advisors to move dealers — at least 10% of Sun Life’s mutual fund sales force could eventually transition to its investment platform, he said.
There will always be mutual fund advisors
Mutual fund-only advisors will continue to play an important role in the wealth management industry, experts said.
At Aligned Capital Partners, for example, most advisors have broader securities registration, but about 80% of client assets remain in managed-product mutual funds, Enright said.
“Fundamentally, the advisor’s business model doesn’t change when they upgrade their proficiency.”
Broader registration expands what advisors can offer without necessarily changing what most clients own, Mastromattei said.
“Advisors that are moving from a mutual fund dealer to a securities dealer are still predominantly keeping the majority of their assets in managed products.”
The bigger benefit is product choice. An advisor serving increasingly affluent or complex clients can handle more of those clients’ needs without referring them to another person.
Mutual fund platforms are also likely to remain an important entry point for newer advisors.
Advisors can progress from selling segregated funds as insurance-licensed agents, to becoming mutual fund representatives and, eventually, being securities licensed as their proficiency and books of business grow, Mastromattei said.
“It’s how it operates today,” Mastromattei said. “That will continue to be the norm for the foreseeable future.”
CIRO’s proposed reforms may remove some of the regulatory barriers attached to moving between platforms, but they are unlikely to produce an exodus from mutual fund dealers. Advisors will likely broaden their registration when their clients and businesses require it, rather than when the regulatory structure encourages it.