Is MFDA still relevant?

Look at it from the clients’ perspective: when they talk to people who hold themselves out as advisors or planners, they expect objective, client-focused advice. The distinction between what an IIROC and MFDA advisor can and can’t do is a nuance they probably don’t—and shouldn’t be expected to—understand.

If a client asks an MFDA advisor his opinion on Apple stock, an ETF, closed-end fund or mutual fund, no matter how good he is, the recommendations will automatically be less objective than those of an IIROC advisor. They’re going to have to tout mutual funds as the right solution—that’s all they can sell.

With the IIROC proposing a new client relationship model, the MFDA is at risk of becoming redundant. IIROC’s proposed model has three tiers of client-service distinction: pure order execution; advisory services; and fully managed accounts. It provides clients with a straightforward understanding of what advisors can and can’t do, and it’s easy for the industry to adjust to.

Fewer filters

None of the reasons the MFDA exists really serve the client. A big part has to do with trying to satisfy banks, which want their mutual-fund sales force to have the ability to sell without having to go much deeper or broader in terms of licensing. They want to set the bar at a less daunting level. But it’s unfair to clients who don’t know the MFDA’s barriers to entry are lower.

There are no limits on how often advisors can take the MFDA exam. I’ve met bankers who’ve failed the exam up to five times. And it isn’t a hard exam. Anyone who can’t pass a second or third time should be barred from writing it again. I wrote the entire IFIC exam in less than 35 minutes.

The MFDA has grown organically. When it was established, there was a distinction between mutual funds, stocks and bonds, and people sought out different advisors for each investment vehicle. Mutual funds didn’t require the same level of knowledge and ability to buy and sell, so they evolved into commodities. Companies packaged them into products that could be sold, rather than advised upon.

But times have changed. There’s a lot more cross-selling, and mutual funds have become a bigger part of an advisors’ arsenal than they were 20 years ago. We no longer need a distinction based on who sells stocks and bonds versus who sells mutual funds. IIROC advisors can sell them all.

Poor pretexts

Some MFDA advisors passionately resist moving to the IIROC platform. But their argument that IIROC is harder is a poor excuse. If you want to be in this business, you’ve got to vie for licenses others already have. When it comes to higher costs of running an IIROC shop, it’s the price you pay to run your own business. Just because MFDA is cheaper, doesn’t mean it’s valid.

The MFDA advisors’ lament that IIROC forces them to become investment managers—as opposed to financial planners—is baseless too. No one’s forcing them to sell more products than they currently do. If anything, IIROC widens the scope of what they can have access to.

I’d rather make a case for the huge benefits that come from crossing over—credibility, objectivity, and access to a larger pool of potential clients. When I made the move from MFDA to IIROC, I had to grow my practice almost overnight to cover for the higher costs and reduced payouts. I had to write the Canadian Securities exam, and the Conduct and Practices exam. But as a result I became a better advisor; and my client base got bigger and better.

Speculating survival

Ultimately MFDA won’t survive. The whole industry should morph into the new IIROC mode, with distinctions based on service provided; not necessarily products sold. That’s a far more effective and transparent regulatory regime. There’s still room to differentiate licensing—for example, a separate license for options trading, which requires a different level of knowledge and sophistication.

Insurance, too, should have a separate licensing requirement because it’s more complex. But all these layers of licensing can be managed within the three-tiered model. The biggest challenge won’t come from the MFDA; it’ll come from the banks struggling to figure out how they want to manage their own retail sales force.

But ultimately, moving toward a clearer model for clients is where the industry should be headed. I hope as new people enter the industry, they’re more attracted to the IIROC model. The icing on the cake would be MFDA firms initiating a move to the IIROC fold.

To be fair to the MFDA, they’re gradually seeking greater integration with IIROC. It might not be the perfect solution, but as long as the MFDA is willing to change and adapt and keep itself current, it’s a step in the right direction.

Stance: We have a bigger problem than MFDA.

We have a patchwork of regulators, most of which accomplish nothing. So the entire conversation about whether the MFDA will survive is pointless when there’s a much bigger problem at hand. Canada pays the most for regulation in the free world; yet we have no unified regulatory structure.

If a client has four different accounts across three different companies—say a bank, a broker, and an insurance firm—she might be dealing with five different regulators. How does that make sense?

Regulatory utopia

The current regulatory structure shouldn’t survive. We need a national regulator to not only provide a unified framework, but also rid us of the numerous toothless self-regulatory organizations. Unfortunately, there are too many vested parties, each with its own interest in staying self-regulated.

The best-case scenario for our industry would be an umbrella regulator, with tiered levels of licensing for different products—like menu options. On the base tier, you could choose an insurance license for selling insurance, a mutual fund license for selling mutual funds; both to sell segregated funds.

The next tier could provide some sort of limited stock-trading license. You could further divide licenses into sublicenses such as futures and options. Beyond that, you could eventually graduate to discretionary money management. If you’re an all-in-one organization, graduating from one level to the next shouldn’t be such an issue.

Self regulation doesn’t work. For evidence, read No One Would Listen: A True Financial Thriller by Harry Markopolos. For ten years, he warned the U.S. government, markets and financial press that the largest and most successful hedge fund in the industry was a total fraud; the much-revered Bernie Madoff was a crook.

Rather than self-regulation, there should be one super organization that regulates the whole industry. Currently you have a three-tiered framework—MFDA, IIROC and investment counsels. But there’s gross disparity between the three. When it comes to market access, IIROC is given infinite latitude, while the MFDA is completely shackled. Shouldn’t there be a tiered system whereby you have to be monitored to the degree to which you actually exercise control over investments?

Split shop

Considering the MFDA and the IIROC both exist for specific reasons, it might even be worth exploring a split IIROC-MFDA regime. We could start at the bottom tier with an MFDA-like structure where everything is third-party managed—advisors don’t direct individual investments; only the vehicles they’re in. The next tier would allow advisors to provide counsel on individual securities. A rung above would be the discretionary money managers who run their own books. And then you’d have the investment counsels. In other words, we could have different licensing levels within IIROC.

IIROC’s current cost structures don’t make sense for everyone. What if I don’t have a business model that fits IIROC? It could cost a lot more to run that operation with very little benefit to my client.

Another thing that’s irksome about many IIROC advisors is their indiscriminate product peddling just because they have free market access. The same goes for mutual fund advisors. They have KYP regulations, but they aren’t really required to justify their decisions. For the sake of our clients, it’s important we don’t just understand what we’re selling, but also build a transparent framework for decision-making

Raise the bar

The barriers to entry in this industry are almost non-existent. With a short mutual fund or insurance course, you can start your own financial shop. You don’t even need a background in business, or any experience in investing. That’s disturbing. In the U.K, you can’t start giving advice until you’ve spent some time in the industry.

But there’s also a flip side to raising barriers to entry. If you pull planners who work at banks into the licensing fold, even a teller recommending GICs behind the counter will become liable to the same standards as someone recommending ETFs.

Maybe it’s time the definitions of financial advisors and planners, and what their roles entail, changed as well. Titles need regulation too.

I don’t expect a drastic revolution. Major players have a vested interest in keeping things the way they are. So let’s launch an evolution instead and work toward integrating IIROC and MFDA.

Regulatory change is only triggered by disasters. No one bothers when everybody’s making money. The second people start losing money, they’re outraged. Luckily, young people coming out of school have higher standards. Let’s hope they set better benchmarks and raise the bar.