Banks halt sales of third-party mutual funds to prepare for rule change

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The new set of rules – known as the client-focused reforms (CFRs) – are slowly being rolled out to the industry in stages.

Fred Lum/the Globe and Mail

Several of Canada’s largest banks have halted sales of third-party investment products from their financial planning arms as new regulatory rules will soon require advisers to have deeper knowledge of the funds they recommend to clients.

Royal Bank of Canada, Toronto-Dominion Bank and Canadian Imperial Bank of Commerce have all notified clients in their financial planning businesses that advisers will no longer be selling third-party funds for any investment portfolios. (The changes do not apply to any of the banks’ full-service brokerage accounts or do-it-yourself investing clients.)

The new set of rules – known as the client-focused reforms (CFRs) – are slowly being rolled out to the industry in stages. Changes to the “know-your-product,” or KYP, rule will come into effect at the end of 2021, and among other things, address conflict of interest concerns such as an adviser’s compensation being linked to proprietary products.

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However, as wealth-management firms begin to prepare for the changes, investor advocates and independent fund companies worry the KYP initiative, put in place to protect investors, may result in a number of independent fund companies being dropped from product shelves and proprietary products being the only option for investors.

TD Wealth Financial Planning, a division of TD Private Wealth, and CIBC Imperial Service, a segment of CIBC advisers that services branch clients with at least $100,000 in investable assets, both announced earlier this year they would no longer be selling third-party funds effective July 1 and June 30, respectively.

In an internal memo, TD notified its staff that the change would “reduce the risk” related to following new regulatory rules that require advisers to have a greater knowledge of the products they are selling.

Peter Lee, CIBC’s executive vice-president of banking centres, said in a letter e-mailed to clients that “by simplifying the range of products available, your adviser can provide more focused advice through a deeper knowledge of our CIBC investment products.”

RBC began reviewing its product shelf at the start of 2021, as a result of the CFRs introducing a more formalized review process, Michael Walker, vice-president and head of mutual funds distribution and RBC Financial Planning, said in an e-mail.

As a result, the bank will drop all sales of third-party funds in its bank branches as of Dec. 31.

“As part of our ongoing review process, we have re-evaluated the offerings available on our product shelf, and have developed a plan that allows us to continue to provide choice to our clients and advisers while ensuring that we fulfil our regulatory obligations,” Mr. Walker said.

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RBC, TD and CIBC all confirmed they will not remove any existing third-party products held in investment portfolios by clients, and may accept transfer of funds for new and existing clients – but no new purchases will be allowed going forward.

At TD, the move to sell only in-house funds created a wave of more than 100 financial planners moving their business over to the bank’s full-service brokerage arm, TD Wealth Private Investment Advice, which continues to allow a client to purchase non-bank products.

Jason Pereira, an independent adviser at Woodgate Financial Inc., a financial planning firm in Toronto, says the recent move by some Canadian banks is an “outright shutting down” of access to all third-party funds, and is “detrimental” to investors being offered the best available fund.

“There is a lot of daylight between having no options and having all the options,” Mr. Pereira said in an interview. “You cannot guarantee that you are going to have the lowest cost exchange-traded fund for every sector of the economy, or the best performing mutual fund for every sector of the economy. So, if you’re saying ‘We’re just going to sell our own stuff,’ then you are basically saying it doesn’t matter even if that is not the best outcome for your client.

“They use regulation as an excuse to make themselves a proprietary shop.”

One of the country’s largest independent fund companies, Fidelity Investments Canada ULC, declined to comment on the banks’ decision to remove them from their financial planning shelves. Like many independent fund companies, Fidelity relies on distribution channels to sell their funds, including all of the Canadian banks. During a public comment period prior to the approval of the CFRs, Fidelity addressed concerns to regulators about the proposed rules leading to more firms closing their product shelves.

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“It would be an unfortunate consequence of the CFRs if more firms adopted closed shelves,” Rob Strickland, president of Fidelity Investments Canada, in the comment letter. “But if they do, it is very important the [regulators] spell out the process for assessing their own products against third party, as well as the consequences along with concrete action that must be taken if proprietary products are unsuitable by comparison to third-party products.”

National Bank of Canada has never sold third-party funds through its branch-based advisers, but leading up to the new KYP rules, the bank will be adding the ability for investors to transfer third-party funds into a new or existing client account.

Nancy Paquet, National Bank’s senior vice-president of strategy, investment and savings, retail banking, said the decision to add the new platform was in step with the addition of 120 retirement investment advisers in the branches, a new role that was created in 2019.

“If we are really serious about providing financial and retirement planning, and looking at the overall situation of our clients, we need to be able to talk about all the products our clients hold and we want to be able to give them the full picture and increase the level of advice they receive.”

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