The Federation of Mutual Fund Dealers (FMFD) has issued a new guideline to its members on how to limit and track the promotional items and activities their financial advisors can accept from mutual-fund companies.
The guideline, set to take effect on Jan. 1, 2020, includes a $1,500 annual limit that mutual-fund companies, which manufacture and then promote their mutual funds, can spend on promotional items or activities such as dinners or event tickets for each advisor. The amount must also not exceed $375 an item or event for each quarter, which is 25 per cent of the annual $1,500. Dealers also aren’t required to track spending on items and activities less than $100.
The guideline aligns with the changing culture of the financial-services industry, away from the old days when some mutual-fund companies would shower advisors with lavish gifts such as expensive trips, tickets to high-end events or luxury goods and toward more modest relationship-building exercises.
The mutual-fund industry is under growing pressure to reduce costs amid intensifying competition from exchange-traded funds and robo-advisors. There’s also a push to increase transparency around how companies do business with advisors.
“The culture is changing to a more professional, more compliant and more client-centric and holistic financial-planning environment,” says Matthew Latimer, executive director of the FMFD, a group that lobbies on behalf of the dealers the Mutual Fund Dealers Association of Canada (MFDA) regulates.
“Excessive spending is oftentimes not useful or unwelcome at the advisory level,” Mr. Latimer says. “Advisors want to be working on the same side of the table as their clients.”
The guideline, which will be reviewed annually, was designed in consultation with dealers and mutual-fund companies, as well as other industry associations and regulatory bodies, Mr. Latimer says.
It comes after the release of an MFDA bulletin in March, which looked at the use of promotional items and conflicts of interest in the mutual-fund industry. The MFDA performed a review of dealers’ practices, which showed many firms either didn’t have procedures in place for tracking promotional items their advisors received from mutual-fund companies, or their policies didn’t provide enough guidance to advisors around conflicts of interest.
The MFDA didn’t recommend dollar limits, but encouraged members to review how much their advisors received in promotional spending from mutual-fund companies and develop policies based on that knowledge. Still, there was some misunderstanding about the MFDA’s position, including around record-keeping of promotional activity, Mr. Latimer says.
The FMFD was tasked with developing a guideline for the industry to follow, including policies and procedures to track promotional items and events.
“The federation needed to take a bold stance to assist the industry in getting a handle on moving forward on this file,” Mr. Latimer says. “Now that we have the first step in place, which is our guideline, we can all work together on what’s next.”
Although the guideline isn’t mandatory, Mr. Latimer says companies that don’t fall within the ranges will “stick out like a sore thumb” in regulatory audits.
“We do hope they adopt it,” he says. “At the end of the day, the federation and its membership agree with the MFDA and its policies to reduce potential conflicts of interest in the area of promotional items and event spending for the benefit of Canadians receiving the best possible and least influenced advice.”
Mark Kent, president and chief executive at Portfolio Strategies Corp., a Calgary-based mutual-fund dealer with about $3.3-billion in assets, and an FMFD board member, says the guideline provides some much needed clarity across the industry.
“It’s important that there be some clarity around what could be offside and how much has to be tracked,” he says. “It’s important to strike a balance to get rid of the really abusive sales practices, which, quite frankly, I think were wrung out of the industry many years ago. I guess it can still happen on a one-off basis, we just haven’t really seen it.”
The guideline should also remove any unfair advantages between large and small firms. “It should level the playing field,” Mr. Kent says, adding that it will also help advisors who are “painstakingly focused on never being perceived as being in a conflict of interest with their clients.”
Michael Stanley, president of Sterling Mutuals Inc., a Windsor, Ont.-based mutual-fund dealer with approximately $4-billion in assets, describes the spending limits as “reasonable,” while still recognizing the importance of mutual-fund companies to be able to remain in touch with advisors.
“This is still very much a relationship business,” says Mr. Stanley, whose firm’s CEO, Nelson Cheng, is on the FMFD’s board. “There’s still a need for face to face communication and education and relationships. The guideline shows that’s important. Rather than have no limit or zero dollars as a limit, it says, ‘This is the maximum that would be deemed appropriate for any given year or quarter.’ It does allow for a breakfast or dinner, but nothing that’s lavish or extravagant that could sway the influence of investment recommendations to Canadians.”
Mr. Stanley also believes the guideline will help advisors feel more confident in their relationships with mutual-fund companies and clients.
“Advisors now have bright lines, so there can’t be any debate now over what we feel is appropriate or inappropriate, which wasn’t there before,” he says. “The fact that this is going to be reviewed annually is also positive. … It’s just good guidance and good collaboration with the regulators … for the benefit of all aspects of our business.”