The Canadian Securities Administrators’ recent change to NI 31-103 recognizes the division of the growing division of labour at wealth and asset management firms both big and small.ravphotographix/iStockPhoto / Getty Images
A recent amendment to Canada’s securities regulation that makes it easier to hire portfolio managers in certain client-facing roles could be a game-changer for wealth and asset management firms looking to add to their ranks.
Canadian Securities Administrators’ (CSA) regulation for registration of advising representatives (ARs) used to require portfolio managers to have at least two years of experience in securities selection and research, regardless of their role. But the addition of new terms and conditions to the registration requirement in National Instrument (NI) 31-103 in June eliminated the need for stock-picking experience for portfolio managers who deal exclusively with clients, creating a new role defined as client relationship manager advising representatives (CRM ARs). Some firms are already looking to take advantage of the change.
“Since the CSA announced steps to facilitate portfolio managers’ use of client relationship management specialists in June … the OSC has received inquiries from [several] interested firms,” says Rachel dePass, senior public affairs specialist at the Ontario Securities Commission (OSC) in Toronto. “To date, we have received a handful of applications and expect to receive more as firms understand how the update may impact their business models.”
For Katie Walmsley, president of the Portfolio Management Association of Canada (PMAC) in Toronto, the change in the rules is a recognition of a growing division of labour at many firms.
For example, big firms typically have portfolio managers (PMs) and analysts on the investment team, making securities decisions, she says. “And then, you have the client relationship specialists who are full portfolio managers with their [chartered financial analyst (CFA) designation] and portfolio management experience, but … they have tended … to help with [know your client] and suitability issues and they’re not making decisions to buy [securities].”
Before the CSA made changes to the rules, many firms found it challenging to hire qualified individuals in client management roles.
For example, Peter Kinkaide, chief executive officer at Raintree Wealth Management, an Edmonton-based boutique discretionary portfolio management firm, says the previous regulations made it challenging for his firm because it was difficult to attract experienced PMs who wanted to work in client-facing roles in a small shop.
As such, the firm sees the new terms and conditions as an opportunity to grow because it offers the firm a path to hire advisors, many of whom are licensed by the Mutual Fund Dealers Association of Canada (MFDA), who are seeking more tailor-made, low-cost portfolios for clients.
“Prior to this [change], it’d be very difficult for an MFDA[-licensed] advisor to qualify as an AR,” Mr. Kinkaide says.
These advisors, many of whom are certified financial planners with significant experience in determining investment suitability for clients, would still require the necessary education and credentials, like the CFA certification, he says. However, they would not have the added hurdle of stock-picking experience.
“Mutual fund advisors almost certainly wouldn’t have that, which is the big barrier to them to qualify as portfolio managers,” he says.
The new terms and conditions “would allow them to become a PM” and provide those planning and portfolio suitability advice pieces, while a full-fledged AR PM would handle the portfolio management side, he adds.
Raintree is already having discussions with these advisors about the possibility of making such a move.
“We’re having a lot of those conversations,” he says. “We think this is a great platform to help them and us grow.”
That said, Ms. Walmsley says that MFDA-licensed advisors who wish to make this move might find it challenging path.
“We posed that question to the CSA, and … it stated it would be unlikely they would have the relevant investment experience,” she says
To Cristian Blidariu, partner at law firm McCarthy Tétrault LLP in Toronto, that speaks to the nascent nature of this regulatory change and the fact many firms need time to familiarize themselves with how the new terms and conditions define PMs’ roles in this new niche, including qualification requirements.
“The individual in a [client relationship management] role would still have to satisfy the educational requirements and most other related experience components,” he says.
That education includes being a CFA charter holder or holding a chartered investment manager designation. Furthermore, individuals must have experience with suitability determinations for clients and “know-your-product” analysis. CRM ARs with discretionary authority would still be fiduciaries, legally obligated to act in clients’ best interests.
However, under the new terms and conditions, CRM ARs would not have the authority to make discretionary or non-discretionary investment decisions for clients regarding securities of any specific issuer, which regulators stipulate must be disclosed to clients explicitly.
The recent changes do not just present opportunities for Canadian wealth management firms, but also some of the nation’s asset managers, including BlackRock Asset Management Canada Ltd., the Canadian division of world’s largest asset-management firm.
“The change will be very helpful toward addressing human resources challenges with the previous regulatory requirements,” says Margaret Gunawan, managing director, head of Canada legal and compliance, at BlackRock Canada in Toronto. “It was very challenging for a global firm like BlackRock, in which roles and responsibilities of client relationship management and portfolio management are very separate and distinct career tracks, requiring different skills and competencies.”
She adds that BlackRock Canada faced challenges finding qualified ARs with stock-picking experience for client-facing roles who work with pension funds and other institutional investors. She points to a recent example in which the company hired an individual with more than 20 years of experience in pension consulting.
“We couldn’t get him registered as an AR, and that was strictly because he didn’t have stock-picking experience,” she says.
Ms. Gunawan adds the individual held the CFA designation and was also an actuary. Yet, to get him registered, the company hired outside legal advice to get a special exemption from the OSC.
Now, with the change to NI 31-103, BlackRock can apply to register portfolio managers in this role without the stock-picking criteria.
Yet, while the regulatory change may help some firms in the investment industry, others don’t see it having much of an impact.
For example, Vancouver-based Leith Wheeler Investment Counsel Ltd., a mid-sized firm that works with high-net-worth and institutional clients, has not faced many challenges in finding qualified PMs to fill a few client-facing positions in the past.
Cecilia Wong, chief financial officer, says she could see how larger firms would benefit because hiring dozens of employees to fill CRM positions would likely be difficult otherwise.
“It’s a bit of a numbers game,” she says. “Hiring only one or two people every year is a bit different when trying to find the best candidate versus a company hiring 200 a year.”