Issues with Fee Based and Managed Account platforms still exist after so many years

In December 2016, IIROC initiated a review of compensation-related conflicts and found recurring themes and concerns. Although disclosure has been widely accepted by regulators as a way to address conflicts, IIROC is dissatisfied with the results of its review.

IIROC has made it clear that disclosure alone is insufficient to address conflicts when it comes to compensation-related matters. The organization has concerns about the growing popularity of fee-based accounts as advisors transition from commission structures.

The main problem, according to IIROC, is that many dealers and representatives rely solely on disclosure without addressing the conflict in a way that considers the best interests of the client. Furthermore, efforts to avoid such conflicts are often lacking.

Additionally, IIROC identified two other failures:

1. An absence of comprehensive review of compensation programs and their associated conflicts.

2. A shift to fee-based and managed accounts without appropriate supervision and/or monitoring of the unique risks associated with these account offerings.

To address these issues, IIROC has provided guidance and next steps:

1. Improve disclosure: IIROC found many cases where disclosure was too vague or meaningless. Firms are now required to make improvements to ensure that the disclosure is prominent, complete, and in plain language, and that the nature of the conflict is evident to the client.

2. Evaluate compensation programs: IIROC noted that compensation programs, especially those involving related-party or proprietary products, can be problematic. Moving forward, IIROC will request additional information from firms about their compensation programs during audits.

3. Address issues with fee-based and managed accounts: IIROC discovered a bias towards fee-based accounts over commission-based accounts among most dealers. While most dealers have a process to determine the appropriateness of fee-based accounts, they failed in reviewing the ongoing suitability of these accounts. IIROC emphasized the importance of assessing the appropriateness of fee-based accounts and implementing robust supervisory and monitoring processes.

IIROC also plans to request information about double charging in fee-based accounts, warning that failure to self-report any issues will result in an automatic referral to IIROC enforcement if significant deficiencies are identified.

IIROC's Next Steps to Address Compensation-Related Conflicts

Building on the guidance provided, IIROC will implement several additional measures to ensure that compensation-related conflicts are properly managed:

1. Enhanced monitoring and supervision: To protect clients' best interests, IIROC will focus on monitoring and supervising the practices of firms and their representatives. This includes ensuring that the appropriateness of fee-based accounts is regularly assessed and that firms have robust monitoring processes in place.

2. Education and outreach: IIROC will work to improve the financial literacy of clients and raise awareness about potential compensation-related conflicts. This may involve creating and distributing educational materials, conducting seminars and workshops, and collaborating with other organizations to promote a better understanding of the risks associated with various account types.

3. Strengthening regulatory framework: IIROC will evaluate its existing regulatory framework to identify areas that need improvement or clarification. This may lead to the introduction of new rules, guidelines, or best practices to better address compensation-related conflicts and protect investors.

4. Collaboration with other regulators: Recognizing that addressing compensation-related conflicts is a shared responsibility, IIROC will collaborate with other regulatory bodies to ensure a coordinated approach is taken to protect investors' interests. This could include sharing information, conducting joint examinations, and harmonizing rules and guidelines.

5. Periodic reviews: IIROC will continue to conduct periodic reviews of compensation-related conflicts to monitor progress and ensure that the necessary steps are being taken to address the identified concerns. Based on the findings of these reviews, IIROC may introduce additional measures or modify existing guidance as needed.

By implementing these measures, IIROC aims to reduce compensation-related conflicts and promote a more transparent and fair environment for investors. Firms and advisors are encouraged to review their current practices and take the necessary steps to address any conflicts or shortcomings identified by IIROC. With a continued focus on the best interests of clients, the investment industry can work towards building greater trust and confidence among investors.