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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 protected.

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 issues.

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 non-advised households.

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 of companies.

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 funds.

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 differences.

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 fixed income.

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 these vehicles.

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 for consideration.

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 stands for?

Ms. De Laurentiis: The Investment Industry Regulatory Organization of Canada.

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 clear conclusions.

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 something?

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 any further.

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 done.

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 2008.

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 served.

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 per cent.

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 calculate.

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 RRSPs.

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 understand it?

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 GST?

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 high.

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 pension funds?

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 industry.

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 held.

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 there longer?

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 conflicts.

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 your industry?

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 employees.

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 purchased.

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 environment.

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 us.

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 a security.

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 financial advisers?

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 year.

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 financial services.

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 market index.

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 served.

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 well?

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 these.

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 advise?

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 simple.

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 all.

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 supervised?

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 that circumstance.

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 live.

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.)