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Insurance advisors must adapt to the world of separate funds | Finance and investment

Earlier this year, the Canadian Council of Insurance Regulators (CCIR) and Canadian Insurance Regulators (CIAR) urged insurers to “refrain from making new FAR sales in separate fund contracts, in accordance with Prohibition1Verse June 2022 in stock, and to provide the transition to halt these sales by 1Verse June 2023.”

Changes in compensation models due to regulatory changes are nothing new to the wealth industry, “but this is the first time it has hit the insurance world,” says Byren Innes, CEO and executive advisor at Jennings Consulting in Toronto.

In fact, the insurance industry – including Managing General Agents (MGA) and manufacturers – scrambling to prepare not only for a FAR ban on sales, but also for potential restrictions or the elimination of advance commissions.

The CCIR and OCRAs said they would consult about initial fees on the sale of separate funds and would consider a full ban in an effort to harmonize mutual fund and mutual fund regulations “to avoid any regulatory arbitration.”

Investment advisors looking to avoid a DSC ban on mutual funds have been able to resort to selling separate funds, but now “no other class of registration is possible,” notes Dan Hallett, vice president and director of HighView Financial Group in Oakville, Ontario.

According to Beren Innes, separate fund sales with DSC have “gradually” fallen as some advisors and the industry anticipate regulatory changes. “In my opinion, however, the bulk of separate fund sales are through DSCs,” he says.

Investment Executive Eight separate box manufacturers asked if they plan to end DSC sales before 1Verse June 2023. The companies also asked if clients could cancel existing separate fund contracts with DSC, with partial or full waiver of early redemption penalties prior to the cut-off date.

Of the six companies that responded, four said they intended to end separate fund sales with the Royal Army before the ban, but did not give a specific date.

John Keelen, Vice President and Head of Investment Distribution at Sun Life Global Investments (Canada), says in an email that use of the deferred sales fee option has seen “steady decline” and that the company has been developing a plan to end deferred sales fee sales by June 2023.

Sun Life advisors no longer sell separate funds with DSC, John Keelen adds, and third-party advisors have “continued to reduce their use of funds with DSC over time.”

The companies said they will work with customers under the terms of existing DAF contracts, which could already allow for early redemption or transfer of schedules between states without penalty. No company has said it will allow early refunds specifically in connection with the planned ban, though several said they are already considering early refund requests on a case-by-case basis.

The trend away from deferred sales fees in separate funds has been accelerated by the growing popularity of commission chargebacks, says Ali Damji, president of HUB Capital in Woodbridge, Ontario. Under this structure, the advisor, not the client, pays the initial commissions if the client redeems the fund early.

Ali El Damji says he supports the FAR ban, but adds that clients “need independent advice, regardless of the size of their assets. By eliminating some of these upfront commissions, clients will have fewer options.”

If regulators go ahead with their ban proposals, advisers will have to grow their investment portfolios or go out of business because “their income will fall dramatically,” believes Kirk Burray, president and CEO of Carte Risk Management, an MGA firm.

“Advisors need to increase their portfolio to $10 million instead of $5 million,” says Kirk Burray, the average size of a separate fund portfolio for a Carte advisor. “For those under $5 million, they may need to partner with another advisor and fund their costs in some way.”

However, advisers sticking with the FAR and/or prior committees are only delaying the inevitable, according to Beren Innes.

The era of split box sales with the Royal Army, he says, “is over – I’m sure of that”. And if the regulators decided not to ban pre-commissions, “they would have a very narrow range: “You can charge X to this type of fund and Y to this type of fund.” I don’t think this is a solution. [en tant que modèle économique à long terme]. The solution is fee-based accounts, quite frankly, and that’s where the mutual fund world has gone. »

Byren Innes suggests advisors considering moving to a fee-based model consider how much revenue they expect to lose as a result.

Portfolio Analysis [d’affaires] It’s the first step – it’s about figuring out the impact that will be, and then what strategies to adopt,” says Byren Innes.

The next step is to reach out to clients to let them know how the insurance industry is changing, says David Gray, lead advisor at Jennings Consulting. At the end of April, the Canadian Securities Administrators (CSA) and CCIR released proposals that would improve overall cost reporting for mutual funds and separate funds.

David Gray recommends that “the first thing you need to do is transparency.” Nobody likes to be surprised.” If the MGA and the manufacturers the business advisor deals with “are not moving as fast as you think” in terms of helping with disclosure and business transformation, “share and make things happen. »

The abolition of military bases and the potential abolition of advance committees may make supporting new advisers at work even more difficult for an industry struggling to attract the next generation.

David Gray emphasizes: “You will have to move away, for the first few years, from a commission based model to get closer to a salary model. This is seen in many IIROC stores. These consist of many small accounts, where one or two paying advisors take over the subject assets. For management, these advisors then move to larger portfolios.”

Cindy David, president and estate planning consultant for Cindy David Financial Group in Vancouver, believes the insurance industry will develop more programs to provide senior advisors with a succession plan. She notes that more and more consultants are passing their work on to their children.

Cindy David believes that moving the industry away from the RFA would be “a good thing, even from a practice standpoint”. If you’ve already canceled FAR, you already have a good idea of ​​the consequences and will be better able to sit back and think about the best way to serve your customer. »

Cindy David concludes that insurance consultants must take on the challenge of changing regulations and finding ways to adapt their businesses to better serve their clients. “Do I want you as my advisor if you can’t figure out how to survive [aux changements dans] your industry? Not right. »

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