Allowing investment advisors to incorporate has long been a topic of discussion in Canada’s financial services industry. But for the first time in years, there are signs it could be back on the agenda.
While financial advisors licensed by the Mutual Fund Dealers Association of Canada (MFDA), except for those in Alberta, have been able to run their businesses through a personal corporation – similar to other professionals like lawyers and doctors – for some time, advisors regulated Investment Industry Regulatory Organization of Canada (IIROC) have not.
Allowing investment advisors to incorporate has been proposed many times in the past. Now, the Canadian Securities Administrators (CSA) says it will be examining the idea in its review of the regulatory framework for the industry’s self-regulating organizations (SROs).
What’s more, the conditions for making the necessary regulatory and legislative changes to allow for advisor incorporation have presumably never been more favourable.
For one, Ontario’s Progressive Conservative government has taken a very pro-business stance since coming to power two years ago.
As well, the chairs of the boards at both IIROC and the Investment Industry Association of Canada (IIAC) are executives at Raymond James Ltd., one of the largest independent investment dealers in Canada, which has long been a proponent of advisor incorporation.
“We’re supportive of the concept,” says Jamie Coulter, executive vice-president, head of wealth management, private client group, at Raymond James.
However, he adds that “it’s been tried many times over the years” and nothing has come of past efforts to move regulators to make changes that would allow the almost 30,000 IIROC-licensed advisors in Canada to incorporate.
That said, the idea has merit as it would provide investment advisors with similar benefits that MFDA-licensed advisors have enjoyed for years, Mr. Coulter says.
Among those advantages is enhanced tax efficiency for advisors in operating their practices. Incorporated MFDA-licensed advisors can divert the commissions they receive from their mutual fund dealers into the corporation instead of receiving it as earned income.
That provides them with a few benefits, including paying business costs – staff, office space, etc. – with pre-tax revenue as opposed to using after-tax income, as IIROC advisors must do for their costs.
“Just in terms of the function of convenience, it’s an advantage,” says Daryl Diamond, an MFDA-licensed advisor at Diamond Retirement Planning Ltd. in Winnipeg.
And by running a business through a personal corporate framework, MFDA-licensed advisors can better control earned income because they can retain some of their commissions-based revenue inside the corporation.
Mr. Diamond says this money can then be invested and used to help grow the business – although he says recent tax changes make it less advantageous than before.
Ian Russell, president and chief executive officer of the IIAC, says the fact the framework for incorporation is already in place in the MFDA channel should make it easier to bring in a model for IIROC-licensed advisors to do the same.
But he says there’s a big difference in the MFDA channel in that most advisors run their businesses independently from their dealers, which may not always be the case with IIROC-licensed advisors.
Another consideration for regulators is liability and concerns that incorporation would create “a protective veil” for advisors who have committed errors or deliberate wrongdoing causing client losses.
Again, Mr. Russell notes the current MFDA incorporation model should provide guidance on this issue as mutual fund dealers and the MFDA currently provide oversight and compliance, and discipline the advisor.
Yet, a lawyer who represents investors in cases against advisors and dealers is skeptical whether investor protection would be addressed adequately.
“If it is not clearly written into the regulations that [advisor incorporation] is not a shield from liability for the dealer and the advisor, then I guarantee there will be years of litigation to determine whether or not it shields them,” says Harold Geller, associate at MBC Law in Ottawa.
He points to past experience for incorporated MFDA advisors, which was ultimately settled through litigation in favour of investors. But the legal route is costly for investors, often facing an industry with deep pockets, he adds.
Greg Pollock, president and CEO at Advocis, says liability issues can be addressed adequately if an MFDA-style framework is adopted – but he questions whether incorporation is truly a priority.
“A lot of the IIROC-licensed advisors we represent are not knocking on our door saying, ‘Advocis, would you please take this issue forward?’”
One reason, he says, is many IIROC-licensed advisors are employees of large investment dealers. To that end, the company pays for many of the advisors’ support services, so incorporation may have less appeal. As well, incorporation would likely also call into question whether it’s the dealer or the advisor that owns the book of business.
Furthermore, even though there are many who support advisor incorporation, getting regulators to allow it is another matter altogether.
Mr. Coulter says IIROC would likely take its lead from member dealers – and he doesn’t fully believe a majority would be calling for the change.
As well, federal and province governments, including securities regulators, would need to be on board. They typically view regulatory changes through the lens of investor protection – and incorporation is largely an issue that would benefit advisors.
“So, while we support it, there are so many dependencies involved it’s just not likely to happen,” Mr. Coulter says.