Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 7 - Evidence - May 12, 2010
OTTAWA, Wednesday, May 12, 2010
The Standing Senate Committee on Banking, Trade and Commerce met this day at
4:15 p.m. to study the extent to which Canadians are saving in Tax-Free Savings
Accounts and Registered Retirement Savings Plans.
Senator Michael A. Meighen (Chair) in the chair.
The Chair: Good afternoon, honourable senators and witnesses. This is
a meeting of the Standing Senate Committee on Banking, Trade and Commerce.
This afternoon we will have our last hearing on the Canadian pension system.
The pillars of the Canadian pension system are as follows: old age security,
public pension plans, private pension plans and individual savings. We will
focus on the tax incentives provided to encourage personal retirement savings.
According to our order of reference, we are studying the extent to which
Canadians are saving in Tax-Free Savings Accounts and Registered Retirement
Savings Plans and the federal measures that might be taken to increase the use
of these savings vehicles, as well as the fiscal cost of increased use. Our
mandate includes finding ways in which savings in these vehicles might be
Today, we have with us representatives from the Investment Funds Institute of
Canada, which represents the Canadian investment fund industry, including fund
managers and dealers. It has been some time since the institute last appeared
before this committee. I think it was five years ago during our study on
consumer issues in the financial services sector.
We are interested in hearing your testimony. We have all received your brief.
We understand that retirement income and pensions is a large subject. Our
mandate is limited to RRSPs and TFSAs. We hope you will focus your comments on
those two savings vehicles.
From the institute, we are pleased to have with us Joanne De Laurentiis,
President and Chief Executive Officer; Charles Guay, President and Chief
Executive Officer from the National Bank Securities; and from Investors Group,
Murray Taylor, President and Chief Executive Officer; and Gaetan Ruest, Director
of Strategic Investment Planning.
Joanne De Laurentiis, President and Chief Executive Officer, Investment
Funds Institute of Canada: Thank you, honourable senators. We are happy to
be back and appreciate the opportunity to speak with you today. We understand
you are near the end of your hearings; it is a privilege to be here.
My name is Joanne De Laurentiis, President and Chief Executive Officer of the
Investment Funds Institute of Canada, IFIC. I am joined by colleagues and we are
pleased to contribute to your study on the extent to which Canadians are saving
in RRSPs and TFSAs.
IFIC is the Canadian association for the investment funds industry. Our
members manage close to $620 billion in mutual fund assets, of which over 70 per
cent are held in Registered Retirement Savings Plans and TFSAs.
As background for some of our comments on RRSPs and TFSAs, we have submitted
to you our comments to the federal consultation paper on Canada's retirement
income system. We sent that to you on April 30. We have also provided important
research on the impact of financial advisers in Canada, based on Ipsos Reid
research, which we will speak to in a moment.
Members of IFIC have been strong proponents of improving the RRSP system and
the adoption of the Tax Free Savings Accounts. Specific IFIC recommendations for
changes to the Income Tax Act and other changes to make these plans more
effective retirement savings vehicles were presented to you by Jamie Golombek on
April 15, and we hope you will take those under consideration.
For our presentation today, I would like to turn to Mr. Taylor, who is an
actuary by profession — but do not hold that against him. He has worked in many
areas of the retirement industry, including defined benefit plans, group
retirement programs, insurance segregated funds and, latterly, in the mutual
fund business. He is also chair of IFIC's steering committee on retirement
Murray Taylor, President and Chief Executive Officer, Investors Group
Inc.: To understand the importance of RRSPs and TFSAs, I will begin with a
few comments on overall retirement resources in Canada. Although pension
coverage may be limited, as other commentators have stated, there is no
retirement income coverage issue because of two key factors. First, the RRSPs
and TFSAs make up $843 billion of the total $1.7 trillion in employer pension
and RRSPs, often described as pillar 3. In addition to that, Canadians have a
further $1.7 trillion in what we have called pillar 4, comprised of
non-registered financial assets. Thus, it is no surprise that the OECD study
shows Canada has an actual income replacement ratio, comparing retirees to
workers, of 91 per cent — one of the best in the world. Our system has not left
behind the poor, as our elderly poverty rate is only 6 per cent, one of the best
four countries in the world.
Canadians are using RRSPs, TFSAs and other non-registered investments in
large measure because of their reliance on financial advisers in Canada. Based
on the Ipsos Reid Canadian Financial Monitor, footnoted here, the
following conclusions are evident about advised households.
First, they have substantially higher investment assets than non-advised
households in each income range and each age group. For household incomes, for
example, between $35,000 and $55,000 of income, households with an adviser have
five times the level of investments as households without an adviser. Other
examples are in the supplementary material.
Second, they have approximately double the participation in tax-advantaged
solutions such as RRSPs. Ipsos Reid found, through a wide sample, that 70 per
cent of households with an adviser had an RRSP, versus only 30 per cent where
there was no adviser. The same type of remarks can be made about RRIFs, RESPs
and TFSAs in particular. In short order, within one year, with an adviser, 27
per cent of clients are using TFSAs, versus 14 per cent without an adviser.
Third, clients with an adviser are more confident they will have enough money
to retire comfortably, compared to those without an adviser — 74 per cent
confident with advisers versus 52 per cent without. Further, they have
portfolios Kthat were more optimally designed for future performance than
For the last four years, IFIC has had Pollara, an independent research firm
study the many opinions of mutual fund holders in Canada. Consistently, 80 per
cent to 85 per cent of those who hold mutual funds want to use an adviser, and
they rank the value the adviser brings and the suitable solutions very highly.
Much has been said about the U.S. mutual fund holders moving in and out of
funds at the wrong time in the market cycle. In contrast, there is no evidence
to suggest this occurs in Canada within RRSPs or other adviser-supported
investments. In fact, in 2009, the average return net of fees for Canadian
mutual fund holders was 17.1 per cent, indicating that our clients captured the
rapid recovery in stock market values because they stayed invested in their
target asset mix.
There have been comments at prior committee sessions suggesting that the
Canadian mutual fund management expense ratios, or MERs, are excessive in Canada
and pose a concern about future retirement wealth for invested RRSPs. These
assertions are not true. For the sake of time, I will point out the most
egregious errors made when claims of high MERs are made about Canada.
Mutual funds in Canada are required by regulation to publish their cost
structure as part of the MER in a more complete and transparent fashion than
most other financial products and mutual funds in other countries. For
reference, the average MER, asset weighted in Canada where advice is present, is
2.31 per cent.
First, let me turn to GICs. They are advertised based only on their return.
However, the fee charged to customers is the spread between the interest paid on
GICs and the mortgage rate charged. Last week, this spread averaged 3.0 per
cent, 3.3 per cent and 4.0 per cent for the one, three, and five-year terms
respectively at our six largest banks.
Second, other countries do not have value-added tax on mutual funds. GST adds
an additional 0.11 per cent, growing to 0.20 per cent to 0.25 per cent on July 1
when HST comes into force in Ontario and B.C. This is an unfair tax on mutual
fund unit holders compared to both other countries and many other financial
services, but this cost is a result of government policy and outside the control
Third, U.S. expense ratios: Canadian MERs are frequently cited as being much
higher than the published expense ratios for U.S. mutual funds. This comparison
generally does not include the advice charge paid by investors in the U.S.
Unlike the Canadian system, American investors pay for advice either through a
front-end charge, typically between 4 per cent to 6 per cent of deposits, which
is not included in the reported expenses, or by a separate fee of 1 per cent of
assets charged by the U.S. adviser and not part of the MER.
When taking these charges into account, the mutual fund costs in Canada are
not materially higher than those in the U.S. Because of the U.S. system, advice
is harder to get; and it comes as no surprise that their system is much less
effective than ours. Notwithstanding the vast wealth of some in the U.S., the
U.S. overall replacement ratio is 86 per cent compared to our 91 per cent; but
their elderly poverty rate is among the highest in the Western world, at 24 per
cent compared to 6 per cent in Canada.
Sometimes mutual fund costs are compared to defined benefit fund costs,
assuming the only difference between these two plans is the cost. Though mutual
fund returns are reported net of all fees, expenses on defined benefit plans are
not fully included in published returns and there is no industry standard to
report such fees.
There is a continuum of costs across a spectrum of pension and RRSP
alternatives. Managing a DB plan is generally the cheapest, in the 0.3 per cent
to 0.75 per cent range for larger plans, as there is only one fund needed and
there is limited administration.
In defined contribution plans and group RRSPs, there are much greater costs
for the investment choices, greater in and out transactions, employee
communications and record-keeping, leading to a range of 0.65 per cent to 1.25
per cent, depending on the degree of services and the size of the plan.
Individual advice-supported mutual funds add a further 1 per cent, for an
overall average of 2.31 per cent, which I referenced earlier. Then, if you want
principal or income guarantees, you add a further 0.5 per cent to 1 per cent,
depending on the guarantee, for a total, all-in general range of 2.75 per cent
to 3.5 per cent for segregated funds from life insurers.
That is the spectrum that we have. However, let me draw us back to a straight
comparison of defined benefit and fund returns. The year 2009 is a good one to
see the value-added for the cost incurred as investment managers and financial
advisers had to respond to actions in the markets and uncertainty about the
emergence and pace of recovery. The asset-weighted return of all currently
published returns for Canada's largest public DB funds, which are footnoted, was
only 10.6 per cent. This compares to the average return for all mutual funds net
of fees in Canada of 17.1 per cent or 19.8 per cent if you exclude money market
Going forward, as DB plans need to hold a higher fixed-income mix because of
their one-size-fits-all single-fund approach, they will be constrained to match
the returns of individually-styled mutual fund returns even with the fee
For example, a recent Towers Watson survey highlighted that many plan
sponsors have been forced to take actions to contain costs and volatility such
as increasing fixed income weighting and lengthening duration in the last 12
months. Our decades' low interest rates will limit yields for years to come on
My conclusion is that there is no free lunch—low cost often means little or
no advice, little or no money management and poorer savings outcomes. Low cost,
one-size-fits-all approaches, such as OAS, CPP, and employer- sponsored DB
plans, have an important role in providing all Canadians with a minimal level of
retirement income. There is no advice offered with your OAS or CPP and limited
advice provided by employer-sponsored plans. Nearly one quarter of capital
accumulation plan participants said they turned to the financial adviser on
their individual savings account for advice during the last market downturn.
Advice is paid for through the retail channel. However, the benefits of
advice extend to all forms of savings and both sides of the household balance
sheet. Key benefits of advice include starting to save earlier and at higher
levels, and building confidence to stay the course on long-term asset-mix
decisions. Financial advisers fulfill a significant role in advancing financial
literacy among adults and their children. Ninety-one per cent of investors
consider their adviser to be among the top sources of information guiding their
investment decisions. Seventy-two per cent of investors with children under 18
years of age cited their financial adviser as the most important source of
information to teach their children about personal finances or investing.
Each individual's circumstances require a personal financial plan. Canadian
financial advisers have proven invaluable in that regard. The value they add to
the Canadian retirement system needs to be recognized and supported.
The fact that RRSPs and TFSAs have become important vehicles for helping
Canadians save for retirement is due, in no small measure, to the work of
advisers. They are on the front line persuading Canadians to avail themselves of
As noted earlier, Jamie Golombek presented IFIC's recommendations on how to
increase Canada's use of RRSPs and TFSAs. I commend those recommendations to you
We would be happy to respond to questions.
Senator Ringuette: I agree that this committee heard from all the
expert researchers and analysts with no personal interests in the issue. There
are high costs associated with a pension plan, including trailer fees — that is
a term I had not heard before — investment management fees and the high cost of
annuities. Do you charge trailer fees?
Mr. Taylor: Within the 2.31 per cent I described as the asset-weighted
number for MERs in the Canadian mutual fund industry is generally a price for
distribution. The advisor cost and the selling process is about 1 per cent. If
you divide that 2.1 per cent, take out tax and GST at 11 basis points, generally
speaking, there are some administration and investment costs, but 1 per cent is
typically the cost of advice.
The trailer fee reference is terminology used in some products. We do not use
that terminology in our company at all. I could answer the question specifically
to say no, we do not charge trailer fees. However, the trailer fee is not a
charge. It is a payment made from the manufacturer to the adviser. It is taken
out of the management fee collected as part of that 2.31 per cent. I want to
address that confusion right off the bat.
Some thought the trailer fee is in addition to the MER of 2.31 per cent; it
is not. The trailer fee is a form of compensation whereby the interests of the
individual and the adviser are perfectly aligned. It is paid on the asset value
of the investment.
When you look at the way advisers work with clients over time, advisers spend
a fair bit of time up front and then keep with the client for a period of time.
For example, our typical adviser — we call them consultants — will spend about
15 hours with a new client in the first month. They will go through a complete
financial plan with the client. The adviser will then spend about eight hours
per year with that client into the future to address changing needs,
investments, et cetera. There is an upfront activity and activity over time. The
trailer fee is the alignment of asset cost.
Senator Ringuette: You are confirming that your advisers have two
sources of funding. The first form of funding is the adviser fee charged to the
person making an investment. Second is the fee the adviser receives from the
investment portfolio that your group provides.
Mr. Taylor: Speaking for my company and 98 per cent of the industry,
no payment is made from the client to the adviser whatsoever. Our advisers do
not collect a fee from our clients. No fee is paid. Our adviser is paid by the
company from the 2.31 per cent fee that we collect.
Senator Ringuette: You collect all the fees. The adviser still has two
sources of fees — the clients that he advises and the products you sell.
Mr. Taylor: No revenue comes to the adviser from the client. I am
sorry; I do not follow the question.
Senator Ringuette: You said earlier that there is a 1 per cent fee.
Mr. Taylor: No, break the 2.31 per cent that the company collects into
two parts. The cost borne by our company to pay our advisers and the whole
system of making products available to the public is approximately 1 per cent.
The other 1.31 per cent is for everything else. Some of that cost is paid based
on asset growth of the accounts.
Charles Guay, President and Chief Executive Officer, National Bank
Securities Inc.: In the brokerage channel, the adviser will charge a 1 per
cent fee based on the AUM he manages for the client. When the adviser charges
such a fee, all of the investment put in the client's account excludes any
trailer fees, commission fees or other embedded fees you may have in bonds or
other securities. The National Bank distributes its products through
full-service, full- commission, investment advisers. We have what we call F
shares, which are mutual funds.
Again, we have the 2.31 per cent from which the 1 per cent service fee is
withdrawn. The charge to the client becomes, let us say, 1.25 per cent instead
of 2.31 per cent because of the tax difference. In addition, the adviser may
charge a discretionary fee of 1 per cent to the client. You never have both
fees. It is one fee or the other.
Senator Ringuette: Do you believe that fee structure that you charge
should be charged only if there is investment growth in the portfolio?
Mr. Taylor: The important aspect with any client is working with the
client, in our view, to focus on the various pieces that they should have in
place for a long-term picture. Because some of the compensation paid to our
adviser is based on the asset value of the account, there is an effect there in
terms of if the values go up, their compensation goes up. If values go down,
their compensation goes down. There is a built-in effect there, if the values
are moving down because of market or other reasons, because of activities of the
client, then it does compensate in that degree. However, our approach to
financial planning is not that we picked the hottest investment for you over the
next six months; it is that we found the right risk tolerance for you as a
client, and what you are prepared to take on by way of how long you have for
this money, your emotional tolerance around risk and assessing all those things.
Senator Ringuette: Do you believe that there should be a code of
ethics for financial advisers to eliminate potential conflict?
Mr. Taylor: I am not sure exactly of the question. There are
responsibilities already built into the licensing arrangements. We have a
wonderful regulatory system in Canada, probably one of the strongest around this
business, through the self-regulatory organizations called the Mutual Fund
Dealers Association and through IIROC. Those organizations hold our advisers, as
do our companies, to a high standard of conduct.
Compliance is a huge part of their activity. It is monitored by branch
management; trades are reviewed consistently. I could walk you through that
whole process. Those responsibilities, I believe, are embedded in terms of the
environment we have today.
The Chair: Could you tell us, for those who might not know, what IIROC
Ms. De Laurentiis: The Investment Industry Regulatory Organization of
Mr. Taylor: It used to be called the IDA; they changed their name. It
is the group that monitors stockbrokers.
Senator St. Germain: Why is it the other people who appeared before us
were so critical of the trailer fees and the various other fees? There was a
consistency with their comments. I would like your explanation as to why they
took the position they did.
Mr. Taylor: I would be happy to take the question. If your world is
surrounded in the pension world — and I began my career in that world, I trained
to that specialty and I advised companies on defined benefit pension plans — and
if your view of the world is that the only way you can solve the retirement
issue is by being a member of a pension plan, then you will come to two very
One is that we have way too low pension coverage in the country, because we
do not have everyone covered by pension plans. The second is that you will focus
on the cost of what you are familiar with; and what you are familiar with is a
defined benefit pension fund, which is a single fund with one objective that can
be managed at a global level for a lower cost.
I did point out to you the difference in returns of that environment last
year compared to ours, and I could go back over time. However, if you are coming
at it with that mindset and all you have studied about our business is the cost,
you will conclude that the only important variable is the cost.
I could go on and on with examples of the value we provide in terms of
helping people start earlier. In the Ipsos Reid material we see where they have
dissected with and without an adviser, the fact that you have five times as much
assets at an income level of $40,000, to me, is the most compelling variable. It
is not the cost variable; it is the activity, the engagement. Have people done
When you just look at cost and say, my goodness, if we could get the cost
down, would not everyone use it? There is no evidence of that anywhere in the
world, but that is why I believe people have come with that viewpoint.
Senator Greene: We heard testimony that the fees in the United States
are substantially less than they are in Canada, roughly one-half the cost.
Mr. Taylor: There are a couple of studies that may have been referred
to. I have seen no other evidence of this. One study that is often referred to
is Morningstar, which gave us an ``F'' on fees. When we talked to Morningstar
about how they conducted their study, it went as follows — and by the way, we
have written Morningstar about their methodologies and we are happy to share
that letter with you. We have a copy here today.
They said that they want to know what the typical mutual fund purchase looks
like in every country that they look at. In Canada, for the typical mutual fund
purchase, 85 per cent of our Canadian people want to use an adviser, so it is
with an adviser and it has a cost of about 2.31 per cent. They then turned to
the United States and looked at a typical purchase. First, they did not include
the items I talked about earlier, and they said a typical purchase is a discount
brokerage purchase of a mutual fund. Vijay Jog echoed that comment, in the
report that went forward to the Whitehorse discussion. When he looked for
investor behaviour in the U.S. and said it was terrible — people went in and out
at all the wrong times — his database was not Canada, it was the U.S.
It was the U.S. discount brokerage business of mutual funds because that is
the most prevalent business in the U.S. That cost is 1 per cent; so Morningstar
simply said, it is 2.31 per cent in Canada and it is 1 per cent in the U.S.
However, if you go to the U.S. and you work through an adviser, which is hard to
find and get to because of the structure they have down there — you have to be
well heeled, the average American does not get access to advice — but if you do,
and you pay the extra 1 per cent and you add that to their cost of 1 per cent
and you add GST as a difference for Canada, you start to come pretty close to
our number. On an apples and apples basis, there is really no difference if you
are comparing similar service.
Senator Harb: Thank you for your excellent presentation. We had a
witness earlier who, in his opening remarks, said we do not have a pension
crisis in Canada, we have a financial crisis. First, do you agree with this
statement? Second, from your experience, the pension fund, RRSPs and others have
lost quite a bit of money. Do you know how much they have lost in terms of a
percentage and where they are at this point? Have they recovered most of it or
part of it?
Mr. Taylor: I am very happy to respond to that question although the
term ``financial crisis'' refers to a broad topic. I would say that much has
been said about the Canadian experience in dealing with the financial crisis and
it has been applauded.
I would start by echoing that the stability of our banks has been well
articulated. The penetration of use of our investment vehicles, because of our
huge dominance in advisers, is also a huge story about how Canada has done well
and served its people during this period of time, in terms of the public versus
private, in terms of RRSPs, non- registered and so forth.
To be specific about it, one thing I quoted as I went through my presentation
was the 2009 experience. Let me tell you how the two years, 2008 and 2009, have
gone, because I think they will go down in the storybooks. Of course, 2008 was a
very significant negative year in the markets, and 2009 was a significant
recovery year. Also, looking at those two years is very informative on these
questions because we are at a stable but low interest rate, and it is kind of
where we start from going forward. You cannot repeat the earnings on fixed
income that we had in the last 10 years, because interest rates cannot go down
With that in mind, we do not have access to the returns of private defined
benefit pension plans. There are those out there who speak on their behalf; but
their data is proprietary. We do not know the methodology or how expenses are
Public plans have come forward. I have the details for the seven or eight
public plans that have come forward — CPP, Ontario teachers, OMERS, Caisse,
Canada Post and so on. The aggregate return of all those public funds on an
investment management basis, without necessarily all their fees but as they
report, in 2008 was minus 18 per cent. During that same period of time, the
average asset return for all mutual funds sold in Canada, after fees — after the
2.31 per cent fee I spoke of earlier — for the industry in total was down 21.1
per cent and ex-money market funds were down 23.3 per cent. That was the range
In 2009, however, the number for the public pension funds reported on an
asset weighted basis, which adds up to $435 billion of assets under management
by defined benefit plans at a cost of 30 or 40 basis points, was 10.7 per cent.
The number for the mutual fund industry net of our 2.31 per cent fee was 19.8
per cent. That is a dramatic difference. I am not saying it will be that high
going forward. That is a composite of individuals who have been very well
One thing about our company is that we have exclusive manufacturing and
distribution, so the people selling our product are known to us, we work with
them actively. We are probably the most intensive or concentrated advice source
because we do not sell other ways; we always sell through advisers.
I had a look at what our median client received. It is one thing to say there
are big numbers in total, but how has our client been treated through this
period of time? The clients of our company last year had a median return of 21.7
If I can go back to your first question about whether we have recovered, the
composite two-year rate for those big public pension funds I spoke of is minus
4.7 per cent. They are still down about 5 per cent. You go down 25, but it takes
more than 25 to come up. They only came up 10.7 last year. After all the fees in
the mutual fund industry, that number was minus 4.1 per cent. Even taking into
account 2008, we have delivered more value.
In addition to that, as I pointed out, people with advisers have seven times
as much saved and 70 per cent of them are using RRSPs as compared to 30 per
cent. The value of that is something some of our critics never point to or
You had a presentation from the Department of Finance. In that presentation,
they pointed out the economic value of RRSPs, TFSAs and non-registered. They
pointed out that if you earned 5.5 per cent and on your non-registered you had
30 per cent dividend income, 30 per cent capital gains and 40 per cent interest,
you would actually earn 150 basis points more by using RRSPs and TFSAs, the very
topic of your committee. That is 1.5 per cent of additional value by moving into
With an adviser, 70 per cent of Canadians have a RRSP. Without an adviser, 30
per cent do. The sheer issue of talking someone into using an RRSP or perhaps
saving when they were not planning to adds huge value to their wealth into the
future, and those issues need more discussion.
Senator Harb: We had another witness who said it is horrible that the
first thing the adviser wants to do is sell RRSPs without asking investors about
their level of income and whether the purchase of an RRSP is suitable for them.
His argument concerned people who make $30,000 or less.
Is this something that advisers normally do in your institutions, or is it
not part of the package?
Mr. Taylor: No, not at all.
Senator Harb: My second question is in relation to the HST or the GST.
Say, for example, you have a fund located in Alberta. When you do a transaction
on the Toronto Stock Exchange, do you pay the HST on that transaction? How does
that work in terms of interprovincial location of funds?
With respect to the 0.25 per cent or 0.2 per cent that will be kicking in, is
that on the profit, the actual transaction or on the fees? Where does that go?
Ms. De Laurentiis: I will talk about the GST issue. It is in flux
because the rules are changing. Come July 1, it does not matter where you are
located as a fund; you will pay tax on the management fee. It will be related to
the value that you are distributing in a province that is harmonized. There is
definitely a tax on the management expense ratios. In fact, today it is 11 basis
points on a 2.3 MER. It will be going up another 16 or 18 basis points.
The point I want to table, since you have given me this opportunity on the
question, is that we have raised with the Minister of Finance the whole issue of
equity in the way that funds are treated from a tax perspective. They are taxed
five times more than other financial services. We are very different from the
rest of the world. For example, in 2008, funds would have paid $670 million in
GST, and the entire banking industry would have paid $570 million, a huge
difference when you consider the size of each group. That is definitely an
equity issue, and it goes to the whole question of fees that has been asked
here, that if we fix that problem, then those fees will obviously be less.
Senator Harb: A government cash cow.
Ms. De Laurentiis: We are, absolutely.
Senator Hervieux-Payette: You are not taxing the fund, you are
collecting tax on the added value or the professional service, as happens with
any other professional service. For example, when we use a lawyer or an
accountant, we pay tax on the professional service. If they are professional
advisers, the same rule applies to them as to any other profession.
Ms. De Laurentiis: I would argue with that. It is a financial product,
a financial service. When we look across other jurisdictions, they really look
at it from the perspective of the investor, the buyer of that product. From that
perspective, you would determine if you are buying a fund, a GIC or a bond, then
you are buying a financial product, and the taxing of those products should be
the same. That is the principle that is applied in other jurisdictions and we
think should be the principle applied here. It is a different perspective.
The Chair: I do not understand that myself. Does everyone else
Ms. De Laurentiis: We are talking about sales tax.
The Chair: HST or GST?
Ms. De Laurentiis: We are talking about GST and HST.
Senator St. Germain: Has this tax been charged since the inception of
Ms. De Laurentiis: Absolutely.
Senator St. Germain: Did you argue over it?
Ms. De Laurentiis: Yes, we did.
Senator St. Germain: Yet, if you buy bonds or GICs —
Ms. De Laurentiis: It is much lower. It is about a fifth the size.
There is an embedded tax, but it is much lower.
Mr. Guay: With some products, there are no fees at all. Many of these
products for which the advisers get commission, where it is embedded, there is
no tax on anything. Therefore, in many cases you will get the products plus the
advice without paying taxes.
For mutual funds, you pay taxes on two parts. This is where we think it is
unfair; it is an uneven playing field within the industry and somehow, because
mutual funds are also used as the primary investment vehicle for retirement
savings, we are kind of taxing retirement savings. Is that what we want?
Senator Massicotte: Thank you for being with us. I am not sure it is
relevant, but in case there is a conflict, I will say I have some funds with
Investors Group and I have relatives working with Investors Group, but I warn
you not to get much comfort from that because I still think the fees are too
I would like to ask for more information on your MERs. You have a long
narrative saying your fees are competitive when you consider total costs. Could
we get a copy of the Morningstar report? Could you provide us empirical data
indicating what the fees are in Canada and what they are across the world,
including the United States? We heard you, and it is very useful you clarified
that because it is information I am not sure we fully understood. However, I
would like real hard data, including the Morningstar report, if you can get that
for the committee.
Mr. Taylor: Yes.
Senator Massicotte: On page 14, you give a return compared to the
large funds. There is such volatility in the returns, could we get that for an
average of five years or 10 years and how mutual funds compare against the big
Mr. Taylor: I do not have that information today but we could look at
it. We had a significant drop in interest rates through that period. You will
find that fixed income component of the pension funds will create a momentary
value that is not repeatable.
Senator Massicotte: The table on page 14 that compares the large
defined benefit plans. I buy into the fact that you delivered higher returns —
but I am cynical that all this occurred because your adviser is smarter than the
people that we paid $1 million to manage the Government of Canada pension plan.
I have to suspect that maybe the risk is not the same. I am not sure it is
apples and apples. However, I would not doubt that the percentage of bonds is
higher in the public pension funds than in the mutual funds. Would you agree
with that? It is a scary comparison.
Mr. Taylor: Here is the difference. By the way, I am not suggesting
that they should be identical over time and that any proper comparison will look
at risk adjusted returns. The number I am giving you on the mutual funds is a
composite. In the case of Investors Group, it is one million clients and one
million conversations. That is only part of it and then it is the rest of the
Senator Massicotte: How does it compare to equity and bonds?
Mr. Taylor: It will be a different mix for every single client.
Senator Massicotte: The average is what you are showing, though.
Mr. Taylor: Yes. I do not have that in hand, but I could get it.
In terms of the mix, I do not think we will find that it is materially
different to some of the mixes that we will see in some of the defined benefit
pension plans. We will probably have a little more equity, as we should. I say
that because that will not be the case necessarily for a 65 year old on a modest
income. They will have a higher fixed income component than the pension funds.
The person who is 35 years old, who has a good career and a long time ahead of
them, should have more equity than the pension fund.
Senator Massicotte: You do not have the information available to tell
us how your investments differ from those public investments, do you?
Mr. Taylor: I do not have it with me, but we can look into that.
Senator Massicotte: I appreciate the information that you have.
However, I would like to talk about an Ipsos Reid study. I buy into the fact
that there is value to getting advisers, but when I look at the tables showing
an immense difference in income levels between advised and those who are
non-advised, I could argue that maybe the person who has more money to invest is
more apt to seek an adviser. If you accept that assumption, which seems logical,
then it diminishes the value of rest of the charts.
Mr. Taylor: On page 3, we have organized it by household income.
Senator Massicotte: Maybe the starting point is wrong. Those who have
more to invest with more naturally seek an adviser. If you start with that, no
matter the income level, then it prejudices the rest of the conclusions.
Mr. Taylor: In our experience, it is the adviser seeking the client as
opposed to the other way around. We do not have people running to our doors
asking for help. However, we talk to the client and talk about the resources
that they currently have and what their aspirations are in the future. We
usually spend four hours with new clients and go through and have that
discussion with them. That discussion usually leads to them deciding that they
should be investing more than they have.
Senator Massicotte: If I have $100,000 to invest versus $11,000, I am
more apt to be quite interested in having that phone call and in employing your
services. Is there is a difference for that $100,000? I am not sure it is
because the advice I received was for $100,000. I would not be surprised that it
was because I had asked about this before I engaged your services.
Mr. Taylor: In addition to this information — and, the data base is
huge — based on how Ipsos Reid does their study, we also have this data by
household asset value. We can share that information with you, but we will find
exactly the same type of orientation in terms of adviser versus non-adviser.
Senator Massicotte: I have the same conclusion, though. If my starting
point is that I am more apt to seek advice because I have more assets to invest,
then all the other pages do not mean much.
Mr. Taylor: On that data, it is organized by household asset level.
For the same asset level, we find that the use of an adviser is based on assets
Senator Massicotte: If you can send that, we would appreciate it.
Ms. De Laurentiis: There is a pre-authorized contribution payment
system where many individuals will be encouraged to put $25 or $50 dollars,
whatever they can afford at the end of the month, into their accounts. I do not
have the data with me here, but those accounts are modest earners. There are a
large number of those accounts. We can provide you with that information.
Senator Massicotte: I will now talk about conflicts. There is a debate
in our country whereby investment consultants would have a fiduciary
responsibility to the clients. That would dominate any other responsibility they
may have to their boss or to their employer.
You have a couple of firms. Would the commission for the person giving advice
be different, depending upon what investment you bought and whether you stayed
in the fund for a year or for five years? Do the commissions vary?
Mr. Taylor: There is a natural variation of price and commission
between equity and fixed income funds and money market funds. That variation is
conventional in the industry and everywhere in the world. There is a slight
difference from that point of view. Other than that, there is little difference
in my company in terms of how someone is paid. They are not paid more because
the fee on the fund happens to be more, other than that slight orientation for
money market funds.
Senator Massicotte: In your company, there was some penalty associated
with certain investments if you stayed one year versus three years. That is, the
commission would be different. In fact, your fellow called me up and said, ``I
want you to know this.'' Do you mind if I get paid more but you have to stay
Mr. Taylor: In our company, we offer two ways in which clients can
enter our funds. They can have a management expense ratio of X and have no
redemption fee associated with that. Our clients are long-term clients. We have
low redemption rates, and, because the environment is such that our clients tend
to stay with us for decades, the compensation to the adviser can be split with a
sales commission up front—a lower asset fee is paid to the consultant in the
future. It is not that more cost is incurred; it is how it is incurred. Two
things happen. First, there is a lower management expense ratio charged to the
client in that circumstance by our company; and, second, there is a deferred
sales charge that slides over six years and becomes zero after six years.
Senator Massicotte: That is Senator Ringuette's point. In other words,
commissions are different, depending upon the amount and length of the
investment. There is natural potential conflict of interest and I am sure it is
the same everywhere. That is, they stay with your company versus moving to the
National Bank, where the sales person will get less commission.
There is a conflict of interest and some are more principled than others.
Some do not care a lot about their clients but they care about the commissions
that they make. Should we be prohibiting that? Should there be a lump sum
payment for consulting advice and that is it; that is all? Therefore, you avoid
Mr. Taylor: That avoids service.
Senator Massicotte: Your people are very principled, though. I am sure
they would give good service anyway.
Mr. Taylor: You have to treat your workers fairly, if I can take that
principle for a moment. If I look at my client base at age 75 today, many of
those clients joined us when they were 25 years of age. They have been served
through that entire period of time. The adviser who serves them needs to be
properly compensated — not unfairly, but properly compensated. That dilemma of
compensating appropriately is an important one.
The second principle I would like to make clear is that there needs to be
more people entering this financial services business. If you want our advisers,
which I believe we do from a public policy point of view, to help middle-income
Canadians with modest opportunity to save who want to work with the adviser over
time, the adviser must be effectively compensated.
The opportunity for advisers to receive a commission up front when they work
with a client to help them get started is an appropriate model. Countries that
have gone against that model have simply created an abandonment of service to
many people in their population. The economics simply do not work for someone to
provide that level of advice.
Senator Massicotte: Do you see any natural conflict of interest in
Mr. Guay: I do not think so. There are two types of distribution
networks: one we could call a distribution network with salaried employees in a
branch, where no conflict of interest is possible since they are salaried
As for distribution by advisers on commission, such as we have at National
Bank Financial, 100 percent of the compensation of the brokers is through
commissions, the amount of which will vary depending on the type of assets
However, there is not really any notion of conflict because everything is
fully explained to the client before selecting and purchasing the various
investments of that client. I believe that our Canadian system provides at the
present time what clients want: choice and flexibility. This is what they get.
Clients can tell an adviser of National Bank Financial that they choose to
pay a fee — as I explained earlier — of 1 percent on the assets managed and any
products that will be added from there on to that client's portfolio will be
exempt of any form of commission.
Another solution would be not to pay the 1 percent fee but to have a small
commission added to any further purchase.
Senator Massicotte: In the latter case, this would apply only to large
accounts, in my experience.
Mr. Guay: No.
Senator Massicotte: Those who contribute $50 or $1,000 get no choice;
they get charged a given amount.
Mr. Guay: At National Bank Financial, you cannot open a $1,000 RRSP
account; you would be referred to National Bank and an account free of charge
would be opened for you with the assistance of a salaried adviser.
Normally, securities brokers in Canada deal with investment accounts of at
least $50,000; and the trend would even be to accounts over $100,000. Under that
threshold, clients are referred to financial institutions that have a different
business model and can serve clients just as well but in a different
Senator Massicotte: So it becomes a typical mutual fund.
Mr. Guay: Mutual funds or other products. We also deal in GICs and
other investment products. The third part of the Canadian distribution system is
that of individual investors who do not want to pay large fees, and this is
possible in Canada. You can buy through discount brokers a lot of investments
where no commission is embedded in the product and which you will choose on your
own. You will trade yourself, make up you own financial plan and make your
savings decisions yourself and so on.
The Canadian system provides lots of choice and flexibility today.
Regulations also ensure that any conflicts of interest are avoided. All these
possibilities must be explained to investors and they are.
Senator Massicotte: You say that conflicts of interest are avoided.
They are not, but there is greater transparency in this regard.
Mr. Guay: There is enormous transparency.
The Chair: Do you have any idea of the respective percentages of those
clients, i.e. those who go to the bank to get financial advice without paying
fees, those who use an adviser and those who are independent investors?
Mr. Guay: I will try to figure it out quickly. I know the numbers, but
I believe they are confidential. If a bank has, for example, 100 clients, some
10 to 15 percent of those could become clients of National Bank Financial or, in
reverse, a client of Financial could become a client of the bank.
So I would say that some 10 to 15 percent of clients will be in the category
of independent investors. These are people who say they do not need advisery
services and who want to make their own decisions about their financial plan and
their investment plan.
The others will do it through the traditional branch network. Some clients
may want a bit of both, deal with a branch financial planner and also deal with
the securities broker because they want to be more involved in choosing more
specific securities or bonds.
The Chair: The greatest number uses an adviser?
Mr. Guay: All our clients can get the benefit of advice. We segment
our business the same way as any business must be: when a client comes in with
$2,000, as you can well imagine, if you charge a 2 per cent fee on $2,000, this
will bring in $40 a year; therefore the client will not get eight hours of
advice a year. He or she will rather be served on the phone or we will have him
in the branch once.
A client who wants to invest $250,000 through the bank will meet with a
financial planner who will draw up a full financial plan.
I would like to add one piece of information regarding a question that was
asked earlier, as to whether when a client walks into a financial institution he
will be pushed towards a given financial product. I can tell you that those who
say that do not know the system as it exists today.
We, at National Bank — and I will speak for the institution I know best since
I have been working there for nine years, but it is the same in all other
financial institutions — we have a very elaborate process in place depending on
the wealth of the client. This is even required by regulation; we draw up a
statement of financial position for the client, we determine his income in order
to identify together with him his financial and retirement objectives.
Then we have a number of tools in place to determine the investor profile of
the client. We ask questions and assess the time horizon of the investments, the
risk tolerance of the person in order to determine if this is a more prudent
investor or one that is seeking more growth.
Next we have a number of other tools to explain the various types of advisers
and distribution networks available in our organization, as well as other tools
to lay out the various types of investments available in order to reach a final
selection as to what network or what type of adviser the client wants to use,
what type of product he wants to purchase, together with a financial plan based
on the needs and goals of the client.
The Chair: Talking about conflicts of interest, I must declare that I
am a client of National Bank Financial.
Senator Massicotte: I do not want to be tough on you. What you say is
fine and dandy but I, like many others, got burned with asset-backed securities
that your bank and other banks sold. No one ever explained to me what they were.
I understand, but a conflict still seems to exist. The guy wanted to sell me
something and we all got burned by these.
As for the performance of self-managed accounts, do you have any results,
over five years, as to the returns of those compared to the other type?
Mr. Guay: That is an interesting question. I would have to make
enquiries. I work in the mutual funds division and not the discount or full
service brokerage. Lots of research has been done in the United States on this,
and even in Canada.
The findings are that self-directed investors often fall victims to financial
behaviour traps, meaning that they make many more transactions which means an
increase in costs in the long run, and they base their decisions way to much on
emotion, which means that they buy or sell too quickly.
I would say that on average self-directed investors — and this has been shown
by U.S. research — get much smaller returns than those who use advisers, who
will be more disciplined and supported in times of volatility and will not panic
at the bad time.
Senator Ringuette: Is it possible for you to provide the committee
with the list of members of your institute?
Ms. De Laurentiis: Yes.
Senator Ringuette: Are your members under the supervision of the
Office of the Superintendent of Financial Institutions, OSFI?
Ms. De Laurentiis: No, as fund managers and dealers, our members are
under the auspices of the securities commissions in the provinces.
Mr. Guay: In our case, as a bank, we are also under OSFI, which also
audits our mutual funds operation. We have all of these regulators looking at
The Chair: Do you think you have enough oversight?
Mr. Taylor: We also have a subsidiary trust company that is under OSFI
as well. However, mutual fund regulation in the domain of manufacturing is with
securities commissions. Delivery is under the SROs, as I mentioned before, but
the MFDA and IIROC are accountable to the securities commissions.
Senator Ringuette: How are you accountable to the securities
commission? Is your accountability based on your product?
Mr. Taylor: Yes. When we sell a mutual fund the transaction is the
sale of a security. Therefore, all security law applies to the sale of a mutual
fund and the relationship we have with a unit holder. The mutual fund entity is
In the licensing regime, there is a new registration regime, called National
Instrument 31-103, which has been put in place across the country. This was done
after many years of consultation and so forth, which has made a strong
environment even stronger. This goes to governance, which goes to compliance
regulation, which goes to independent review committees in terms of our
activities, managing conflicts and investment rules.
A wide range of rules have built up under the 81, 101, 102, 103, 104, 107,
and 105, 106 as well, each on a different aspect, some dealing with how the
funds are marketed, some on how the funds are administered. There are very tight
rules of compliance and audit in that regard.
Senator Ringuette: Approximately two months ago in The Washington
Post there was a full-page article describing the huge bonuses that have
been paid in the U.S. to financial advisers. Is that the situation in Canada?
How do you compare to the U.S. on that issue?
Mr. Taylor: My expectation of what you read in the U.S. was probably —
I could be wrong — not financial advisers as much as perhaps financial traders,
and others in not the pure banking part of the banking world but in the trading
and what we will call very extreme investments. I would say that the
compensation of our advisers, the people helping our clients, is quite
controlled. It is controlled because the cost is controlled based on those
assets I described earlier. The examples of what our advisers get as they help
clients will build as they build clients and assets and so forth, but it is
nothing like the kind of formulas you have seen in the United States.
Senator Ringuette: Do you give monthly or yearly targets to your
Mr. Taylor: No, our advisers are entrepreneurs from that point of
view. We help them, we train them and we help them understand the things they
need to know to do their trade. We help them understand how they can market
themselves in their communities. It is up to them to reach out and help clients
and, as they are successful in doing so, then they are compensated.
Senator Massicotte: I will make a comment that is generic not
necessarily to mutual funds, but every several months we read an article in the
Economist referring to Morningstar, showing a study that in seven out of 10
years the best- managed mutual funds do not beat the index on an average of 70
per cent probability. I am sure you will say yes, but that does not include, if
you ever went to indexed funds, the costs of the indexed funds, but if you made
adjustments out of 10 years it beats nearly all the funds. In fact, even some of
the dépôt organizations now have a choice to say they are going indexed funds
and not to actively managed funds.
Could you comment on that, and why would we spend the fees on your side?
Mr. Taylor: Let me break it out this way: Most of the comparisons made
include the cost of advice and I have described that as 1 per cent. That cost is
not in trying to find the best fund per se. It is in helping clients with their
overall financial needs and so when you are comparing active management versus
passive management of a fund you cannot include those. However, because there is
a greater prevalence of active management in funds that have an adviser attached
to it, very often the research very simplistically looks at the total cost
without adjusting for that item. That is one issue. You have to take 1 per cent
out of that 2.3 per cent to have a fair comparison to passive management, which
is often and most often not sold.
Senator Massicotte: Why not the whole 2.3 per cent? I forget, because
1 per cent is the sales cost.
Mr. Taylor: The 1 per cent is the cost of having an adviser in place,
because as soon as you go passive you generally do not have an adviser in place
and there is no provision of cost from the passive products for an adviser. They
are not paying an adviser for that.
Senator Massicotte: Up to 2.31 per cent is the adviser. Is the other
1.3 per cent the transaction costs?
Mr. Taylor: It is the investment management costs; it is the
administration costs; it is all those other costs of taxes, GST and so on. That
is the first error we often see when there is a simplistic comparison that way.
The second thing that is often ignored, which you commented on, is that the
cost of investing in the index is not the same as the index. There is a cost,
and Mr. Guay could go into details on it because of the offerings they have at
the bank, but it is usually about 40 or more basis points of transaction costs
or other costs or gaps to benchmark. The indexes are never matched identically
and so forth. That is often ignored on the passive side.
When you adjust for both of those now you have something that is easier to
compare to, and I have yet to see any compelling studies when those two
adjustments are made that say you do not get an advantage from active
management. It does not mean you will always have it at every particular cycle
because also within the cycles, active management tends to outperform the index
more or less.
Senator Massicotte: Not out at 10 years, but I can appreciate one
Let us say you adjusted for the management costs. I have done that manually
for the rate of return. They are still ahead at something like 70 per cent or 80
per cent probability. What you are saying is obviously the person who goes with
the index fund has to decide what kind of index out of the many choices. You are
saying that the advice is worth 2 per cent, because they are now up to 3.4 per
cent. That is a tough one. It is a value call that everyone must make if you say
2 per cent.
Mr. Guay: The cost is one component. The fact is that what we call the
index products cannot fully replicate the return of the index. There is what we
call a tracking error that could be more than 4 per cent a year because of all
of the different situations in the index that you cannot have within the product
you are buying.
The other question is whether we really want to invest in the index for a few
reasons. First, you will have higher volatility in the index, which means higher
risk, than you would probably have in the fully diversified, professionally
managed portfolio. In an index you buy the good companies but you also have the
bad companies, which the professional portfolio managers are trying to avoid.
You also are guaranteed that you have no upside at all. You will never beat the
index if you buy the index.
The last thing is that many indexes, specifically in Canada, are really not
optimal in terms of diversification. Remember in 2001 Nortel alone was more than
40 per cent of the index. Do you want that in your portfolio? In 2010, 75 per
cent of the index is invested in two sectors out of 10: The resources and the
The Chair: Is that in Canada?
Mr. Guay: Yes, in Canada.
Most of our clients are inclined to invest more in Canada than elsewhere in
the world, specifically with the currency and the direction that we have had
over the last few years. We had a speech 10 years ago saying that it was
important to diversify outside of Canada, that Canada was only 3 per cent of the
world market caps. That has gone a bit against us because the currency has
appreciated so much, but today I would make the case in terms of good
diversification I always say ask Americans how much they are ready to invest in
Canadian markets. If you get 10 per cent you will be lucky. We are too often too
comfortable having too much invested in Canada, which is a very poorly
diversified index that some professionals in the industry compare as an emerging
Senator St. Germain: I want your opinion on the RRSPs, concerning the
71-year trigger. You people are managing this and this is really what we are
studying. We have concentrated on fees, we are beating you up on fees today, but
do you have a comment on that? We have had various comments from various
witnesses on that issue.
Ms. De Laurentiis: We made a recommendation from our observation.
Moving it from the age of 71 to 73 years, is that the point you are making?
Senator St. Germain: Seventy-one to not having —
Ms. De Laurentiis: The recommendation we made was to the age of 73
because we also appreciate the cost side to the government. We think 73 years of
age is a reasonable age to move it to. That would provide room for individuals
who do not retire at the age of 65 or even the age of 70 and do not need to draw
from those funds. It is a forced draw that does not appear to make sense.
Mr. Taylor: I do not know the public policy costs, but it would be
easy to figure out. Then you get into the utilization of it.
If I could come at the question in a slightly different way, with respect to
the consciousness of the non-registered assets, when I look at our clients'
assets, what happens is the average assets by age goes up continuously. The age
bracket in our company with the highest average assets is 85-plus. However, when
one turns 71 years, the average assets in RRSPs or RRIFs starts to go down. From
a public policy point of view, is that okay? Maybe it is, but when one is
talking about retirement, you must include the non-registered assets, the pillar
4 I began with in my presentation. If you do, then Canadians are being very well
On one hand, if government would say they will make the tax rules even better
than they are today, our industry will be grateful. Do we need to make them
dramatically better? Actually, what we need to do is get more people using
advisers because that is the biggest variable in terms of usage that is ongoing
in Canada today.
The Chair: Senator St. Germain, did you ask about lump sum payment as
Senator St. Germain: No, I did not. Go ahead and ask it.
The Chair: I wonder if anyone wanted to comment on it. I know the
brief we received from Jamie Golombek comments on the lump sum payment.
Ms. De Laurentiis: That is really our brief. We agree with what Mr.
Golombek told you.
Senator St. Germain: Is this the $100,000 lump sum?
Mr. Taylor: You are referring to more of a lifetime concept. Because
finances come in different ways at different times for different people, that
concept would make it easier for many people to utilize RRSPs, TFSAs or both.
The Chair: Except there is a rollover provision, is there not? If you
do not use the RRSP this year, you can use it next year.
Mr. Taylor: Yes, you can carry forward today. People are building up
the equivalent of a lump sum.
Senator Massicotte: You can roll over to your spouse.
Mr. Taylor: Yes, I believe you can roll over to your spouse.
Senator Massicotte: Not to your children, though. Is that correct?
Ms. De Laurentiis: Not to your children.
Senator Hervieux-Payette: Since you have already declared your
conflict of interest, let me say that I also deal with National Bank Financial.
I have dealt with many institutions. When you provide advice — we talked earlier
about conflicts of interest — you make choices. There are costs related to
Whether it be the Investors Group or National Bank, you have your own funds
but you also sell the funds of others. There is an incredible proliferation of
funds out there. I do not know how you manage to find your way through all of
them. Do you know the managers of all those funds and what transactions take
place within them? This is the big question is terms of security. You can buy
into a fund made up of Canadian, American, international or Asian equities.
There are many different categories. Is there never any conflict between your
own interest and that of the client? You help the person to choose. The person
coming for advice is not in a position to analyze all these funds. They do not
have the knowledge and even you have to rely on a great number of analysts,
unless you decide at the outset to exclude half of the funds in the market.
Between you and me, there are risks. Mutual funds are presented as being more
secure because they are more diversified. But this is not necessarily true.
One of my concerns about this type of instrument, besides the fees, has
mainly been security of the investment. We have seen an insurance company that
guaranteed a 5 percent return and that has had huge problems because of it. But
5 percent was not a huge return. You guarantee 17 percent. So I wonder: if at 5
percent that company almost failed, even though it had billions of dollars in
revenue, how do you choose financial instruments for the investors that you
Mr. Guay: It will be a pleasure to answer. You have two distribution
networks and two different business models. To make an analogy, when you walk
into a Toyota dealership, you expect to buy a Toyota. They will not sell you a
Honda. But when you walk into a National Bank branch, we sell you our products,
whether they be mutual funds or GICs, and we will establish your investor
profile. We sell several types of products. They have been packaged in a turnkey
fashion to suit your profile. The selection offered is relatively small and
The other business model is that of the securities brokers, which is National
Bank Financial. In my group we look after mutual funds, we have a research
department. We have processes in place, for example, with a committee that
authorizes the mutual fund companies that will be distributed by our firm. There
are some 60 mutual fund companies in Canada and 90 percent of them are
authorized for distribution by National Bank Financial. If we have doubts as to
the soundness of a firm or wonder about risks of fraud, it is easy for us to
exclude it from our distribution list.
Next, we have a team that does continuous research in order to help the
advisers to make sense of it all. So all new information about mutual funds is
included in a weekly bulletin that is given to all advisers and a list of
recommended funds is drawn up. For each category of assets, such as money
market, fixed income and subcategories, we have two or three funds that we
believe to be the best in the industry and that we recommend to the adviser.
When the adviser does his research, he has everything at the tip of his fingers.
Ultimately, he is able to make his own selection. There are many funds in
Canada; there are series, and the same type of fund exists in multiple series.
There are some 2,500 funds in Canada and nowadays, we have up to 12,000 series.
The harmonized sales tax could even force the industry to have even more series,
one for Alberta, one for Ontario, one for the Maritimes. This makes no sense and
I hope that the government and the industry will not go into that direction. And
within all of that, as you can imagine, there are hundreds of funds that belong
to financial institutions with their own networks. We at National Bank Financial
do not sell products of the Investors Group.
We probably sell very few Royal Bank or TD products, but they are available.
I would say that the universe of the adviser who does business with you is
likely limited to 200, 300 or 400 mutual funds, which is a more manageable
number. Does this answer your question?
Senator Hervieux-Payette: It tells me that right off the bat they will
try to sell me National Bank funds before those of other institutions.
Mr. Guay: At National Bank, the basic tenet of an adviser at National
Bank Financial is independence. Our funds are available but the broker will go
so far as to tell you: if I sell a National Bank fund, I am in a potential
apparent conflict of interest, therefore if the quality is the same I will not
sell ours, I will sell that of a competitor. In order for an adviser to
recommend a National Bank product, ours must be ranked as the best available in
the industry. This is the same concept where we say: you choose the products you
want to sell and the sales commissions will be the same.
Senator Hervieux-Payette: You will die of saintliness! As far as we
are concerned, we understood that your people can make a difference. It is very
human to start by looking at one's own products. I think this gives us a very
good idea of the complexity.
I can understand the gentleman would promote the use of advisers seeing how
difficult it is to make choices.
Mr. Guay: Indeed, it is difficult for investors to make sense of it
Senator Hervieux-Payette: A fund is not something that is stable, it
is constantly in motion, transactions are being made daily in those funds and it
is rather difficult to follow it all. All we can hope for is that your teams of
researchers are skilled enough to follow it all. But I doubt they are able to.
Mr. Guay: This is where the advisers come in, why it is important to
have advisers in the industry in order to guide the choices of clients.
The Chair: Thank you. Allow me to ask one last question. You talked
about advisers. We heard a lot about rogue traders.
If there are rogue traders, are there rogue advisers? If there are rogue
advisers who give bad advice, who take under- the-counter payments or who behave
in other improper fashions, how are they caught? Are they caught by the
securities commission? Are they caught by their employers? How is that
Mr. Taylor: The heart of external regulatory involvement, I will call
it, is in fact the MFDA, the Mutual Fund Dealers Association, and IIROC for
investment brokers. They have very rigorous rules which are backed up by the
securities commissions. Those rules affect both the registration of the adviser
and the privileges and responsibilities that come with that, but there are also
two levels of supervision. There is on-site supervision by a branch manager, and
that is a formal designation that one has to register for; and second, there is
the responsibility for the dealer, and I am using the legal entity here, call it
head office supervision of the supervisors; and then formal audits are done with
regularity and often unannounced spot audits by these regulators.
In addition, a firm like Investors Group Inc. has an active internal audit
department. We have an active compliance department. I have 45 people in my head
office compliance department. This is not a trivial task. We follow this
consistently. Our people have a trade blotter so every single trade goes through
a check. When an adviser comes in with a client's money and puts in a trade, a
deposit to be made, a purchase of funds, that comes electronically in front of
our branch managers every day. They have to check for suitability and
appropriate requirements. There are suitability guidelines that say you must
look at a client's circumstance to decide where they fit on the spectrum of
risk, and you have to ensure that the transactions being done for them fit with
When I say that there is a branch manager looking at this, it is not just,
oh, there is some money. Is it suitable? Does it meet those technical
requirements? That structure creates a culture of compliance probably stronger
than any part, I would say, of the financial services industry in Canada. The
importance of these transactions is bred into our people.
Now, how do you catch people to the extent that someone goes off the rails,
and in any business, that kind of thing can happen. Due to these checks and
balances, you find those things. As a company, we do many audits. We send
letters out to our clients. We ask for verification, all the normal financial
responsible things to ensure that everything is handled correctly.
We monitor all our complaints actively. I get reports at all times to see if
there are any trends, any concentrations. I could go on and on, but that is the
environment in which we live, and it is the legal regulatory culture in which we
The Chair: Thank you very much. I assume Mr. Guay agrees.
Mr. Guay: It is almost identical.
The Chair: Even better, probably.
Mr. Guay: I would not say so.
The Chair: Thank you all very much. It has been a pleasure to have you
as witnesses. You have clarified a number of items for us. We appreciate the
time you took to come. We hope it will not be five years, Ms. De Laurentiis,
until you come back.
With that, I will adjourn the meeting. I would ask members of the committee
to stay behind for a few minutes for an in camera session.
(The committee continued in camera.)