Editor’s note: An earlier version of this story contained references to Tony Warren, an Alberta man who said he had paid tens of thousands of dollars annually in fees and commissions to Canaccord Genuity Wealth Management. In fact, the fees he paid were significantly less than that.
For the first time in nearly two decades, Canada’s wealth management industry faces the prospects of a radical overhaul.
Despite significant reforms in other Western markets, the vast majority of Canadian investment advisers continue to be paid through commissions. Each time they buy or sell shares, their clients must pay them a fee for executing the trades. Canada is fertile ground for these brokers, with a sizeable number of households who have the sort of healthy six-figure portfolios that can support frequent trades.
But the regulators are watching, and, collectively, the provincial securities watchdogs have gone so far as to propose sweeping reforms to the multibillion dollar industry. The groundwork has already been laid for more robust disclosure of the fees that investors pay, and mutual fund companies may have to curtail the amounts they pay to advisers in return for selling their products.
These are, potentially, radical shifts in a business that has been slow to change. Dave Agnew, head of Canadian wealth management at Royal Bank of Canada, calls it the “largest challenge that the wealth management industry has faced in many, many years.”
Yet some advocates for reform are skeptical about their chances of success. The major chartered banks are a powerful lobbying force, and they have become more dependent than ever on fees from wealth management – it’s a safe harbour as other streams of revenue decline. And despite the regulators’ copious legwork, which includes holding hearings and a conducting a thorough study of mutual fund fees, critics are unimpressed. They say they have seen this all before.
In 1994, the Ontario Securities Commission hired retired securities lawyer Glorianne Stromberg to study the industry’s problems and to propose fixes. Her report was scathing, but little changed. Today her proposals are even bolder, going so far as outlawing the title “investment adviser.” “It’s a travesty,” she says. Clients hear the word “advice” and think the brokers will always look out for their best interest. A more accurate job title, in Ms. Stromberg’s view, would simply be “salesperson.”
Canadians have more than $3-trillion in financial wealth, and pay billions in fees and commissions annually. Will the securities watchdogs have sufficient grit to crack down on conflicts of interest in how that money is managed? Or will backroom pressure by financial institutions put the kibosh on their efforts?
Paid according to ‘the grid’
The list of critics who believe the current system is a blight on the industry includes some individual investment advisers. Ottawa’s Marc Lamontagne came to resent the commission model. “I thought I was a financial planner,” he says, reflecting on his early days in the industry during the 1990s, working for now-defunct Regal Capital Planners. “In actual fact, what I should have been was a salesman. That was the only way to make money.”
It wasn’t long before Mr. Lamontagne, who is now an independent financial planner, shunned commissions for a model that charged his clients a fixed percentage of their portfolio each year. Today his clients have a firm grasp on what they will have to pay, and everything is in the open.
That differs from the prevailing model, which gives investment advisers a strong incentive to maximize their commissions. Across Canada, the vast majority of brokers are paid according to “the grid,” a sliding scale that dictates what cut of client fees flow to them, and what percentage their firm keeps. At CIBC Woody Gundy, the retail brokerage arm of Canadian Imperial Bank of Commerce and one of the largest such firms, an adviser whose revenues amount to $375,000 a year brings home, on average, 38 per cent of that, or $142,500, according to a copy of the bank’s grid obtained by The Globe and Mail.
While the exact percentage fluctuates from firm to firm, they share a key principle: The more an adviser brings in, the bigger his or her slice of the pie becomes. Brokers who generate revenues of at least $1-million a year are usually entitled to at least 50 per cent of the fees they bring in.
Commissions, not investor returns, also dictate industry status. Retail brokerages typically reward their top advisers by admitting them to special clubs – BMO Nesbitt Burns’ is known as the President’s Council – even though the designations often have no connection to portfolio performance.
To hit these targets, advisers rely on more than trades. Mutual fund companies offer advisers a split of the annual fees that investors pay them to manage their money. These payments, known as trailer fees, typically add up to 1 per cent annually.