Investment firms are wooing star advisers – in exchange for their client book

Canada’s investor protection framework has long had a reputation for being weak and not particularly well-enforced. Investors are still often paying excessively high fees and hidden charges on investment funds. Advisers are often under no legal obligation to act in their clients’ best interest. And even when an investor has been harmed by their investment dealer, there is no binding dispute resolution system to ensure their losses will be recovered.

Multimillion-dollar payments are dangled as inducements, on the condition that the adviser brings the majority of their book of investors with them. Big changes across the investment management landscape in recent years have made for heated competition between firms. A push for lower fees and greater transparency around the cost of financial advice has squeezed profit margins. Slowly but surely, mutual fund fees in Canada, as around the world, are trending downward, while more and more investors are drawn to a lower-cost passive investing approach.

“It’s worth paying up to bring on high-end financial professionals,” said Matthew McGrath, chief executive officer of Optimize. Mr. Spiring pointed to his firm’s upgraded technology program, an open product shelf that does not include proprietary products, and the ability for advisers to own equity in his growing company. “When you can directly explain to a client what they will receive in a move, then it becomes pretty transparent on why you are suggesting a move,” he added.

But these inducements in recent years have inflated well beyond what could be considered a reasonable cost of transition. “The amounts being paid are so gross that it would be shocking if consumers knew how much many advisers are being compensated,” said Harold Geller, an Ottawa lawyer who represents investors with claims against their advisers.

The New Self-Regulatory Organization of Canada, which is the temporary name given to the group of merged regulators overseeing all investment dealers in Canada, said advisers are expected at all times to properly manage conflicts of interest. “Should an adviser choose to move to a new firm they, and their firm, must continue to follow all disclosure and conduct requirements including those relating to conflicts of interest,” the New SRO wrote in an e-mail.

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