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Upcoming regulations are already affecting firms’ product lineups for in-branch advisors, this year’s Report Card on Banks reveals.

Less than one month after researchers finished surveying advisors for this year’s Report Card, the first wave of the Canadian Securities Administrators’ client-focused reforms (CFRs) took effect on June 30, ushering in new conflict-of-interest requirements that include rules for firms that sell proprietary products. But know-your-product (KYP) and know-your-client (KYC) requirements that take effect Dec. 31 have led some banks to stop allowing new purchases of third-party products.

Most of the four product-focused categories in the Report Card saw little change compared with 2019 (research was paused in 2020 due to the pandemic). But “Freedom to make objective product choices” fell to 8.4 in 2021 from 8.9 two years ago, barely hanging on to its longtime place among the 10 highest-rated categories. The category’s satisfaction gap (the amount by which a category’s importance rating exceeds its performance rating) rose to 0.9 from 0.7 in 2019.

The first bank to announce its intentions publicly, Toronto-Dominion Bank (TD), received the lowest rating in the product freedom category (6.5, down significantly from 8.0 in 2019).

In early March, TD said it would no longer give retail branch advisors access to third-party investment funds as of July 1. This change represents a 15% reduction in branch advisors’ product shelf, said Dave Kelly, former senior vice-president and head of TD Wealth Private Wealth Management and TD Wealth Financial Planning, in an April interview.

The reduced product shelf only affects clients who use a branch-based advisor — not brokerage clients or direct investing clients, Kelly said. Branch-based clients who already held third-party products prior to July 1 or transfer them into the bank won’t be required to sell them.

Kelly said TD wanted to focus on “the most competitive” products and simplify its in-branch product shelf ahead of the CFRs’ enhanced KYP and KYC requirements that take effect at the end of the year.

The regulations will introduce new expectations for advisors, who will be required to consider a reasonable range of alternatives before making a product recommendation that puts the client’s interest first. This could make it harder for advisors to recommend pricier products if similar ones are available at a lower cost.

Report Card research uncovered apprehension about the changes to TD’s product shelf among the bank’s advisors, who work within TD Wealth Financial Planning.

“I’m royally pissed about the third-party [products] being taken away. It’s an unethical way to squeeze revenue out of us at the expense of the client,” said a TD advisor in Alberta.

“Eighty per cent of my book is already TD [products], but I’m disappointed that we’re losing the flexibility,” said a TD advisor in Ontario. “If one [in] 10 clients wants to go a different way, it’s an issue for me.”

Kelly argued that TD’s in-house experts and smaller shelf of funds, some of which use third-party subadvisors, would allow advisors to spend more time on KYC responsibilities. He acknowledged the bank was undergoing “a big change” and said financial planners had received guidance on what this would mean for their clients.

Not all advisors were upset about the changes to TD’s product shelf. One advisor in Alberta said the bank has “done a lot to enhance our core offering.” (TD was rated 7.2 for “Quality of product offering” — similar to its 7.3 rating in 2019, but still the lowest of the six banks surveyed in 2021.)

David Terry, vice-president and head of TD Wealth Financial Planning, said TD has set aside “a lot of Q&A time” for planners and created client conversation guides.

“[We’re] allowing [planners] to ask questions of management, responding as openly and candidly as we can, and also taking in some great insights from the financial planners to ensure that we evolve our thinking to reflect their concerns,” Terry said. In an email, Terry added that in-branch advisors would have access to ETFs in November.

Even at the banks with the highest product ratings, advisors still expressed concern about the choices they could offer clients.

The top-rated firms in the product-quality and freedom categories were once again CIBC (rated 9.3 and 9.4, respectively, and relatively unchanged from 2019) and Royal Bank of Canada (RBC; rated 9.1 and 9.4, also relatively unchanged).

While some respondents at both institutions said they were free to choose products objectively, others felt constrained. As one CIBC advisor in Ontario put it: “We are supposed to sell PPS [CIBC Personal Portfolio Services]; that’s my job.” Meanwhile, an RBC advisor in B.C. (with RBC Financial Planning) said, “They’re intentionally pigeonholing us into RBC’s products.”

Both RBC and CIBC reviewed their in-branch product shelves in light of the CFRs.

In an email, RBC confirmed it would “not be offering [branch-based] clients new purchases of third-party funds,” effective Dec. 31. Like TD clients, RBC clients will still be able to keep or transfer in third-party products already in their portfolios.

The effect should be minimal for the bank, as “only a small percentage (about 1.5%) of our assets under administration are held in third-party funds,” said Michael Walker, vice-president and head, mutual funds distribution and RBC Financial Planning, RBC.

As for CIBC, the bank simplified its range of products available to CIBC Imperial Service advisors on June 30 to focus on in-house products.

“This change allows our advisors to offer more focused advice through a deep knowledge of our CIBC investment products,” said Peter Lee, CIBC’s executive vice-president, banking centres, in an emailed statement.

National Bank of Canada (NBC) was rated second-lowest in the product freedom category (7.7 in 2021, down significantly from 8.5 in 2019) but among the top three for product quality (8.7, up from 8.3).

“We’re only allowed to offer National Bank products,” said an NBC advisor in Quebec, who added, “Our products are enough for what I need.”

In June, Nancy Paquet, NBC’s senior vice-president, strategy, investment and savings, retail banking, said that National Bank Investments Inc. (an NBC subsidiary used by the bank’s planners to access products) “did simplify its product lineup.”

That simplification led to some strategic and managed portfolios being cut and merged into other products, she explained. However, the bank continues to launch ETFs and environmental, social and governance funds. NBC also plans to add third-party funds through a new investment platform for its branch-based advisors, Paquet said. “We feel confident that we can train our people [on products].”