The Canadian Investment Regulatory Organization (CIRO) is proposing a new model for advisor incorporation that would enable all advisors to flow their revenues through a tax-saving corporate structure, regardless of their dealer’s registration status. However, there are still regulatory hoops to jump through before the industry’s long-held dream of adopting business structures that are common in other professions can finally be realized.
In an effort to address the long-standing disparity between fund dealers and investment dealers in the kinds of compensation models that can be used, CIRO is now proposing a new approach that would see it phase out the existing “directed commission” model and introduce a new “incorporated advisor” model.
The proposal would make advisor incorporation open to all reps, regardless of their dealer’s registration.
Historically, fund dealers have allowed reps to use some form of personal corporate structure, while investment dealers have not. More recently, firms that are registered as fund dealers, or dually-registered, have allowed reps to flow a portion of their compensation through a corporation — allowing them to benefit from favourable tax treatment on those revenues — while that option isn’t available to firms that are solely registered as investment dealers.
The proposed model
Under the proposed new approach, all types of CIRO-regulated firms would be able to offer the new compensation model.
In the new model, advisors’ corporations must be registered and the reps that use them would have to be approved by CIRO, while the activities that can be carried out within the corporation must be approved by the dealer. The rules would also require a written agreement between the dealer, the rep and their corporation setting out the terms of these arrangements.
The only voting shareholders of these corporations would be the individual rep, although their family members could hold non-voting shares.
According to the regulator’s consultation on the proposed model, while there will be added administrative and transition costs for firms and reps that adopt the model in the short term, it’s expected that the industry will benefit in the long run by harmonizing the compensation models that can be used by different types of dealers, and by enabling reps to reap the tax advantages of flowing their revenues through a corporation — which CIRO suggests could improve access to advice by making it more financially viable for reps to join, or stay, in the business.
And, while the new approach would be optional for firms, the consultation suggests that firms that don’t decide to offer it may be at a competitive disadvantage when it comes to attracting and retaining advisors.
Similarly, reps that don’t use the proposed new option may be also be at a slight disadvantage, as more tax-efficient reps may be better able to compete for clients by passing along savings to them, the regulator suggested.
For investors, the self-regulatory organization (SRO) said the impact of the proposal will be neutral, “as existing investor protections will continue to apply” regardless of the compensation model dealers and reps adopt.
Indeed, CIRO is also proposing a series of rule changes to ensure that the introduction of advisor corporations doesn’t disrupt the chain of accountability from the activities of reps to their dealers — which has long been a concern with allowing corporate structures in the investment dealer industry.
Alongside the implementation of the proposed new model, CIRO plans to phase out the existing “directed commission” model, which the SRO said “is necessary as there are increasing tax compliance risks associated with the use of this option and variations from one firm to the next as to the portion of advisor compensation that is being directed to the advisor’s corporation.”
Next steps
However, the planned changes are likely still a long way off, given the policy work ahead.
To start, CIRO’s proposed rule changes are out for a prolonged 120-day comment period, until Nov. 6.
After its proposals are finalized, and approved by the Canadian Securities Administrators (CSA), the proposed model will require changes to securities legislation, which adds a further complication, given the difficulty of coordinating legislative changes among the various provinces.
In the consultation, the SRO noted that “the CSA is in the process of determining which securities legislation amendment approach to pursue to enable the implementation of CIRO’s proposed harmonized advisor compensation rules” — specifically the changes needed to preserve the chain of accountability from reps to their dealers.