Banks start to limit third-party fund offerings

How banks’ will use new KYP rule to push house brands

You’ve had a savings account with Royal Bank (or TD, CIBC, or wherever) for years. You’re tired of the infinitesimal interest rate you’re receiving so you decide to do something about it.

You ask the teller (yes, some branches still have them) what the options are. An RRSP? A TFSA?

“Wait just a moment,” you’re told. “I’ll see if Ms. Smith is available.”

A few minutes later, you’re escorted to Ms. Smith’s office. There’s a name plate on the desk, identifying her as a financial advisor. She greets you warmly, makes a little small talk, and then gets down to the serious business of how much you want to invest and what your goals are. She dutifully enters all this information on her computer, asks a few more questions, and then pushes the print button.

She slides a piece of paper across the desk. You check it out. It’s a list of Royal Bank (or TD, or CIBC, funds). There’s nothing on it from CI, AGF, Fidelity, or any of the other independent mutual fund managers.

“Thanks,” you say, but my friend tells me he’s done well with Beutel Goodman American Fund. It’s not here.”

“Sorry,” says Ms. Smith. “We don’t offer that fund, or any others except ours.”

This is a scene that’s going to be enacted countless times in the coming months as we approach the introduction of the “Know-Your-Product” (KYP) rule, which takes effect Dec. 31.

The rule is supposedly designed to help consumers by forcing advisors to focus on the funds best suited to a client’s needs instead of those that pay the highest commissions.

In reality, it will greatly limit investors’ choices. The banks are by far the largest sellers of retail mutual funds. Until now, they have pushed their own funds but also offered some third-party options. The three banks mentioned have now announced they will no longer do that. It’s their products or nothing. The rest will likely follow suit soon.

The banks argue that this will allow their advisors to develop more in-depth knowledge of their own funds, thereby enabling them to better serve their clients. This is pure bull. Independent financial advisors are expected to be knowledgeable about a wide range of products and choose the best among them for clients. The bank’s argument implies its own people are too stupid or too lazy to do that.

Of course, they’re not, so let’s understand the real motive here. By eliminating third-party funds, the banks hope to force more money into their own products, thus building their wealth management base and the fees associated with it.

The Ontario government sees this action for what it is and has asked the province’s Securities Commission to investigate. We’ll see where that goes.

Unless the regulators intervene, the I suggest you not deal with your bank’s financial advisor. Rather, open an account with a brokerage firm (discount or full-service, whatever suits you best). They will continue to offer a full range of products, including ETFs.

The banks are taking advantage of a rule that was supposed to benefit investors to pad their own bottom line. Don’t let them get away with it.

Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website.

Follow Gordon Pape on Twitter at https://twitter.com/GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney.

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