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This article appears in the September 2022 issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.

Freedom to make objective product choices is important for financial advisors in all channels. And while that freedom has eroded for branch-based advisors and planners with Canada’s major banks, most advisors are happy with their product selection.

Citing the product-knowledge requirements in the Canadian Securities Administrators’ client-focused reforms (CFRs), CIBC, Royal Bank of Canada (RBC), and Toronto-Dominion Bank (TD) ended the active selling of third-party products by branch advisors last year — matching the long-held practices of the other Big Six. (For example, National Bank of Canada had not even allowed the transfer in of third-party products for incoming clients before investment platform upgrades in 2021.)

Last year, Ontario Finance Minister Peter Bethlenfalvy asked the Ontario Securities Commission to review this shelf shrinkage and report back by February. The report had not been made public as of press time.

In the 2022 Report Card on Banks, the “freedom to make objective product choices” category received an average performance rating of 8.2 out of 10, down from 8.4 a year ago. That rating has dropped over the past five years from 8.8 in 2018. (There was no Report Card on Banks in 2020 due to the pandemic.)

CIBC, RBC and TD told Investment Executive when the product changes were made in 2021 that smaller shelves would help advisors manage growing compliance requirements while having minimal effect on asset levels. The banks also stated that clients could still purchase third-party products through their direct investing or brokerage arms.

This year, they reiterated their positions.

“A streamlined product shelf allows us to spend less time on security selection, which we know is not the big driver of financial results, and more time on client relationships and building and servicing the plan itself,” said David Terry, vice-president and head of TD Wealth Financial Planning. Terry added that more than 80% of TD branch planners’ assets were held in TD-branded products prior to the policy change on July 1, 2021.

Peter Lee, CIBC’s executive vice-president of banking centres, said his bank’s shelf is well-priced and consists of more than 140 mutual funds and approximately 24 managed portfolios, some of which are sub-advised by third parties.

Michael Walker, vice-president and head, mutual funds distribution and RBC Financial Planning, said only 2% of clients’ assets were in third-party funds when they made the change last year. “As we did that review, we [examined] our shelves and the calibre that we have with RBC Global Asset Management in terms of their industry-leading products, and we made the decision,” he said.

In-house products made up 90.8% of the average bank advisor’s book in this year’s research (as of Dec. 31, 2021), up slightly from 88.3% the year prior, before the CFR-tied changes took place.

Further, the use of proprietary managed product (i.e., in-house wrap accounts) has rebounded: such products accounted for 21.0% of the average advisor’s book, up from 13.4% in 2021, and compared with 23.0% in 2018. (This product data doesn’t include Bank of Nova Scotia due to advisor business model differences.)

Many advisors with CIBC, RBC and TD were open about their pre-existing preferences for in-house products.

For example, an advisor with TD in British Columbia said, “I welcome [the product changes] because it lowers my risk. It lets me focus on financial planning as opposed to investments and, I think, there’s a broad enough product shelf.”

Several CIBC advisors said they felt no pressure and could find what was best for their clients, while an RBC advisor in Atlantic Canada said, “The proprietary changes weren’t an issue for my book. I have very little interest in non-RBC funds. People trust [RBC products] based on reputation and past performance.”

But a minority of advisors didn’t agree with the proprietary approach. The most vocal were with TD (working under TD Wealth Financial Planning), which received a 5.2 for product freedom. That rating was down significantly (by 0.5 or more) from 6.5 a year ago and from 7.5 five years ago (in 2018), when most advisors said there was only informal pressure to focus on in-house product.

“I can see why [product shelves changed] but it’s not the easiest experience when dealing with clients,” one TD advisor in Ontario said in this year’s Report Card. “I understand the risk and compliance aspect, but it does limit the options for clients.”

“I feel like the new CFR changes have created a conflict of interest. It’s extremely restrictive,” another TD advisor in Ontario said. “They didn’t need to close it to only proprietary products, in my humble opinion.”

Some advisors with banks that rated highly in the product freedom category had similar views.

“If I could [sell] third-party funds, it would be much better,” said an advisor in Ontario with CIBC Imperial Service.

“We are kind of forced to use in-house wraps,” said an Imperial Service advisor in B.C. CIBC was rated highest of all the banks in this category, at 9.4, unchanged from 2021 but down from 9.6 in 2018.

At RBC (where advisors work for RBC Financial Planning), an advisor in Ontario said, “I don’t like the fact that we no longer have the ability to provide third-party funds. I think the banks all took a strategic decision to eliminate [such funds from their] offering.” RBC was tied for second-highest for product freedom (with BMO) at 9.2, down from 9.4 a year ago but higher than a rating of 9.1 in 2018.

Along with product freedom, what set the strongest-performing banks apart in the 2022 Report Card was fund quality and innovation.

RBC and CIBC were top rated in the “bringing new investment products to market” and “quality of product offering” categories, as well as leading the Report Card by IE rating (the average of all of a bank’s category ratings).

Those banks’ results were 9.1 and 8.9 for new products, respectively (up from 8.7 in 2021 for RBC and unchanged for CIBC). Their ratings for product quality were 9.1 and 9.0, respectively (unchanged for RBC and down from 9.3 a year ago for CIBC).

RBC is “ahead of the curve compared to some of the other competitors. [There’s a] very solid track record with [RBC] Global Asset Management,” said an advisor with RBC in the Prairies.

Another RBC advisor in Ontario noted that they preferred that the bank focus on refining its older, “more popular” products instead of “adding a bunch of new stuff to a shelf.”

One CIBC advisor in Ontario said fresh products are always available, although other advisors suggested that compliance-related red tape and the CFRs could make selling new products difficult.

Advisors with TD rated their bank lowest of the Big Six for new products and product quality once again in 2022 (at 7.3 and 7.4, respectively, the first unchanged and the other up from 7.2 a year ago). TD also was the lowest-rated bank by IE rating in this year’s Report Card.

“They could have faster, more timely launches to reflect what’s happening in the industry,” said one TD advisor in Ontario, who also requested better-quality GICs and a broader set of ETFs.

TD and RBC said one of the ways they remain competitive is by offering third-party fund access within their proprietary products.

Terry said TD’s managed portfolios include third-party funds. Also, as of November 2021, he said TD is “one of the only firms in a branch-banking environment to provide direct access to ETFs for those clients. We know that’s a big consumer trend.” (TD Wealth Financial Planning advisors are securities-registered.)

At RBC, Walker said, a new proprietary line of global portfolios “invests exclusively in a curated selection of third-party fund managers and products.” The bank also launched index ETF funds in January that branch advisors can access.

If banks’ branch product lineups are adjusted again based on forthcoming regulatory reviews, clear guidance for advisors will be necessary.

A National Bank advisor in Ontario, reflecting on the CFRs, said they were grateful for the bank’s compliance podcasts, while a TD advisor in Ontario said they appreciate when “there’s a lot of support in how to apply [CFR changes] into our everyday practice.”