At the end of the day, debates over regulation aren't about determining winners and losers
In an exclusive interview with Wealth Professional, Sandra Kegie, the president of Kegie Consulting and executive director Federation of Mutual Fund Dealers, shares her thoughts on how contrasting and differing interests are not barriers, but essential elements in resolving debates on regulation and compliance.
What do you think is the most significant regulatory and compliance challenge faced by the Canadian financial industry?
On the regulatory side, I believe fees are most important. The impact on the industry — clients, advisors, dealers, fund companies, service providers and regulators — depends on where they end up. If they’re way over at one end of the spectrum, banning trailers, unbundling all commissions including DSC, and forcing the industry to adopt and adapt to a straight fee-for-service model, it would change everything for everyone. A balance can always be reached that benefits everyone, and disadvantages no one. It’s all contingent on how committed the powers that be are.
As for compliance, the biggest challenge is to achieve every compliance officer’s fantasy: that all of their advisors are able, and do work in a fashion that wholly complies with their SRO’s (and their dealer’s) rules, expectations, etc. The majority try very hard to comply and succeed, some don’t always succeed, and some don’t try at all. It’s the latter, the proverbial “bad apple,” who drives regulation, as with anything that’s regulated. To all the advisors who still say that no regulator’s going to tell them how to run their business, wake up and smell the coffee. The good news is, you can still likely get what you want at the end of the day, but the “how” should run through compliance before you do anything. Your CO should be your best and trusted friend at your dealer.
What are your thoughts on the current proposal to ban embedded commissions?
I understand that our regulators are concerned. Other jurisdictions around the world have expressed similar concerns. Some studied the field and determined not to change the embedded commission model; others took some pretty radical actions. Keep in mind that other jurisdictions’ financial services industries are structured differently than ours, and the results from the actions they’ve taken have been mixed.
Canada has an international presence and our regulators don’t want to be seen to be doing nothing, especially if concern is warranted and a solution can be found. Investor advocates and industry have lobbied, research and reports have been commissioned, but a definitive solution that would assuage all eludes us. In fact, while I would hope we have a common goal, we are not aligned.
Personally, I support the Federation of Mutual Fund Dealers’ position of choice: that clients should be provided with a choice as to how they pay for their advice. I believe that “choice” is something everyone can get behind as a focus of investor education and disclosure around remuneration. This is something that I want and expect as a consumer of a product and service (that is taxed): choice.
Do you have any ideas on what should be done to address conflicts of interest related to compensation for advice?
Disclosure was the regulatory solution 20 years ago. Today they say additional disclosure is not the solution and I would agree. There are existing disclosures that are required to be provided to clients and I’m a strong advocate of not adding to those, but looking at them again with a view to making them more relevant to and readable by clients. If trailer fees and commissions were standardized across the industry by, say, class of fund, equity fund, bond fund etc., would it attract the same concern?
It is important that the industry as a whole be considered, and by that, I mean a balance must be possible between investor protection and the health of the industry; if we need more time to find it, we should take it. The industry relies on investor satisfaction, and investors rely on the good reputation of the industry. Regulators should be there to support the sound interests of both.
Related stories:
How advisors should be helping investors
How to fix the advisory industry’s image problem
What do you think is the most significant regulatory and compliance challenge faced by the Canadian financial industry?
On the regulatory side, I believe fees are most important. The impact on the industry — clients, advisors, dealers, fund companies, service providers and regulators — depends on where they end up. If they’re way over at one end of the spectrum, banning trailers, unbundling all commissions including DSC, and forcing the industry to adopt and adapt to a straight fee-for-service model, it would change everything for everyone. A balance can always be reached that benefits everyone, and disadvantages no one. It’s all contingent on how committed the powers that be are.
As for compliance, the biggest challenge is to achieve every compliance officer’s fantasy: that all of their advisors are able, and do work in a fashion that wholly complies with their SRO’s (and their dealer’s) rules, expectations, etc. The majority try very hard to comply and succeed, some don’t always succeed, and some don’t try at all. It’s the latter, the proverbial “bad apple,” who drives regulation, as with anything that’s regulated. To all the advisors who still say that no regulator’s going to tell them how to run their business, wake up and smell the coffee. The good news is, you can still likely get what you want at the end of the day, but the “how” should run through compliance before you do anything. Your CO should be your best and trusted friend at your dealer.
What are your thoughts on the current proposal to ban embedded commissions?
I understand that our regulators are concerned. Other jurisdictions around the world have expressed similar concerns. Some studied the field and determined not to change the embedded commission model; others took some pretty radical actions. Keep in mind that other jurisdictions’ financial services industries are structured differently than ours, and the results from the actions they’ve taken have been mixed.
Canada has an international presence and our regulators don’t want to be seen to be doing nothing, especially if concern is warranted and a solution can be found. Investor advocates and industry have lobbied, research and reports have been commissioned, but a definitive solution that would assuage all eludes us. In fact, while I would hope we have a common goal, we are not aligned.
Personally, I support the Federation of Mutual Fund Dealers’ position of choice: that clients should be provided with a choice as to how they pay for their advice. I believe that “choice” is something everyone can get behind as a focus of investor education and disclosure around remuneration. This is something that I want and expect as a consumer of a product and service (that is taxed): choice.
Do you have any ideas on what should be done to address conflicts of interest related to compensation for advice?
Disclosure was the regulatory solution 20 years ago. Today they say additional disclosure is not the solution and I would agree. There are existing disclosures that are required to be provided to clients and I’m a strong advocate of not adding to those, but looking at them again with a view to making them more relevant to and readable by clients. If trailer fees and commissions were standardized across the industry by, say, class of fund, equity fund, bond fund etc., would it attract the same concern?
It is important that the industry as a whole be considered, and by that, I mean a balance must be possible between investor protection and the health of the industry; if we need more time to find it, we should take it. The industry relies on investor satisfaction, and investors rely on the good reputation of the industry. Regulators should be there to support the sound interests of both.
Related stories:
How advisors should be helping investors
How to fix the advisory industry’s image problem
