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Salaries are set to become more common for financial advisers in Canada, along with entirely new forms of compensation as the investment industry adjusts to a world without deferred sales charges (DSCs).
Regulators have banned sales of mutual funds that penalize investors for early withdrawals. The new rules take effect on June 1, followed one year later by the end of segregated funds containing DSCs.
Proponents of DSCs argue they’re necessary for younger advisers to cover their costs while building up their businesses and, more broadly, for advisers to justify serving clients smaller accounts. Opponents claim that, aside from the potential for abuse, DSCs have effectively killed any incentive advisers might have to modernize their compensation structures.
Now that DSCs will soon no longer be an option, industry insiders are bracing for big changes.
For those who are newer to the industry, DSCs would’ve helped them survive, says Maria Jose Flores, chief compliance officer at Carte Wealth Management Inc. in Mississauga.
“But now, the problem that we’re going to be facing is that nobody wants to serve accounts that are less than $100,000 because even if you charge a 1-per-cent fee, that’s nothing on a month-to-month basis,” she says. “So, [advisers will] say it isn’t worth their time.”
Advisers working at the big banks will likely see an “influx” of clients who have smaller accounts from independent dealers as part of a broader “consolidation” once the DSC ban takes effect because salaries tend to make up a much larger proportion of these advisers’ income, according to Ms. Flores.
Bill Charles, chief executive officer of Global Maxfin Investments Inc. in Richmond Hill, Ont., says DSC sales have been on the decline for years as it became increasingly apparent that regulators were looking to end the practice. His company’s DSC holdings have dropped from more than 20 per cent of its overall book of business a decade ago to roughly 5 per cent today.
Advisory firms will need to come up with “creative ways” to deal with the impact of that decline on recruitment, including giving new advisers a more “predictable income while building their business up to a certain level,” Mr. Charles says.
“There are lots of things that firms can do,” he says, “but bringing in younger advisers into the business is going to be a challenge the industry has to address.”
Some experienced advisers are adopting an apprenticeship-like model in which they bring in younger advisers with titles such as “associate” or “junior adviser” in order to provide the same type of hands-on training and stable income that newer advisers used to get from DSCs, he adds.
How to work without commissions
As for serving smaller accounts in economical ways without DSCs, other countries such as Australia, Britain, the Netherlands and South Africa, which have all banned sales commissions paid to advisers, offer case studies on how it can be done.
“This bridge has already been crossed by every other country that has a financial advisory industry,” says Jason Pereira, partner and senior financial consultant with Woodgate Financial Inc., and president of the Financial Planning Association of Canada in Toronto. “There is an entire cohort of advisers who have been figuring this out for years now.”
Subscription-based services, often referred to as the “Netflix model,” are becoming an increasingly popular option for advisers looking to earn a steady income stream from clients who don’t necessarily have large sums of money to invest. The model already exists in Canada. David O’Leary launched Kind Wealth in 2017 with a model in which clients pay a set monthly retainer fee.
“The percentage-of-assets model ensures that advisers will work with only the wealthiest 3 to 5 per cent of Canadians,” Mr. O’Leary told Globe Advisor in 2019. “If you take a percentage of investments, then you can’t make money from the average Canadian who has only $10,000 or $50,000 to invest.”
While subscription-based services remain a relatively small part of Canada’s financial advisory industry, Mr. Pereira expects the end of DSCs to accelerate the adoption of new compensation models.
“DSCs were too lucrative for too long,” he says, “so, there was previously no need to do anything else, but now that’s about to change.”
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