Nearing the end of 2022 means we’re getting closer to the starting line of a new self-regulatory organization (SRO).
On Jan. 1, 2023, the merger between the Mutual Fund Dealers Association of Canada (MFDA) and the Investment Industry Regulatory Organization of Canada (IIROC) will launch.
As with any merger, it takes time to integrate rules, functions, policies, etc., so we don’t expect to see significant regulatory changes out of the gate from the new SRO. But we have been taking stock of potential viable shifts that could occur down the road and subsequently impact how advisors and their firms earn revenue, the investments they sell, how advisors are licensed, and how dealers build their product platforms. These questions will be topics of future articles, but, in the meantime, we’ll close the year with a high-level summary of what might be at stake under a new SRO.
Is Writing on the Wall?
The current MFDA and IIROC platforms offer distinct advantages to advisors who choose to be licensed through one of these channels. For example, the MFDA allows licensed advisors to hold off-book client assets and to incorporate their businesses. In addition, MFDA firms generally offer better grid structures to advisors than IIROC firms, but there are trade-offs to these schedules (technology support being one). IIROC, on the other hand, allows licensed advisors to run discretionary and fee-based businesses. IIROC firms also tend to have strong brand recognition and bigger budgets to support their salesforce. The questions on our minds, and surely yours, is whether these advantages change under the tapestry of a new SRO. Here’s a speed-run look at some considerations.
|What’s in Question||Potential Impact|
|Off-Book aClient Assets||Could the new SRO prohibit advisors from holding assets held in client name?||If the new SRO disallows advisors to hold off-book assets, it could force MFDA firms to repatriate those client assets (held elsewhere back in-house and put them into nominee name. IIROC does not allow advisors to hold off-book assets.|
|Personal Corporations||Could the new SRO:|
get rid of personal corporations altogether; or allow IIROC advisors the ability to incorporate; or let current personal corporations stand but discontinue the ability to incorporate moving forward?
|If the new SRO goes with option 3, MFDA-licensed advisors who currently have personal corporations can keep them; for everyone else, they would lose the ability to incorporate in the future.|
|Compensation Grid||Generally, MFDA firms retain a lower percentage of an advisor’s top-line revenue while this split is reversed in IROC firms. Could firms change their grid structures?||As wealth management becomes more competitive and more digital, it could lead to changes in grid structures within MFDA firms. Firms with higher grids might find themselves having to adjust percentage payouts in order to build out their technology stack and digital capabilities.|
|Discretionary Trading||Could the new SRO allow discretionary management capabilities to MFDA-licensed advisors?||Currently a competitive advantage in the IIROC channel, discretionary capabilities allow advisors to scale their business. Should the new SRO make changes to licensing requirements, it’s possible that MFDA advisors could run discretionary businesses provided they satisfy new licensing requirements.|
|Fee-Based Business||Could the new SRO allow MFDA advisors to run fee-based businesses?||Running a fee-based business is another core advantage for IIROC advisors. Under the new SRO, it may become available to MFDA advisors. Helping to make this case is the future potential for the regulators to discontinue trailer-paying mutual funds. Should that happened, a vast majority of MFDA advisors would need fee-based accounts to earn revenue.|
|Licensing||Licensing is generally handled at the platform level (MFDA or IIROC). Could a new SRO change how advisors are licensed?||Rather than be platform-dependent, licensing could be based on graduated levels. Each level of licensing could be tied to the amount of risk associated with the investment products. For example, an advisor with a level one licence might be restricted to selling only mutual funds, whereas an advisor with the highest level of licensing could sell the full spectrum of securities.|
In the new year, we’ll delve into the above topics as the new SRO comes into clearer focus. We’ll also look at some opportunities and challenges facing advisors and their firms. Today’s takeaway is the firms that prepare for potential changes ahead will likely be in a better position to compete under a new SRO landscape.