CSA Reform: IIROC & MFDA Merge, Mako Customers Ready

August 6, 2021

CSA Reform: Mako Fintech Customers Are Ready for IIROC and MFDA Merge

A new self-regulatory organization (SRO) was formed in Canada this week, merging the Investment Industry Regulatory Organization of Canada (IIROC), and the Mutual Fund Dealers Association of Canada (MFDA), following ongoing discussion and consultations with the Canadian Securities Administrators (CSA).

There has been increasing overlap between the two regulatory bodies, and IIROC has been advocating for the merger for some time now. Canada is the only G20 country without a national regulatory body. While a second phase could include even more registration categories that are currently under provincial regulators, the initial reform comes in response to inefficiencies, duplicate regulations and confusion from investors.

What Does the IIROC and MFDA Merger Mean for Advisors?

The implications of an SRO for Canadian advisors are far-reaching. IIROC President and CEO, Andrew J. Kriegler, said in their press release that this new pan-Canadian SRO will "better protect investors, increase access to advice, and support innovation." This is following IIROC’s announcement last August, stating that the consolidation could save almost $500 million in the next ten years across the financial services industry.

The CSA has also said that this new SRO will:

Benefit all stakeholders and protect Canadian investors
Synchronize rules between IIROC and MFDA where applicable
Create new efficiencies for market participants
Streamline the process for complaints
Demonstrate a commitment to public interest

CSA chair and president, Louis Morisset, says the new SRO is "designed to protect Canadian investors and enhance public confidence, accommodate innovation, ensure fair and efficient market operations and navigate continually evolving industry conditions."

Advisors are already responding in favour of the merge. Jason De Thomasis, the COO at De Thomas Wealth Management thinks it’s a good idea, with a lot of support from the industry, because advisors no longer have to interpret two sets of similar regulations.

Jayson Horner, President, CEO, and Co-Founder of The CanDeal Group, said “this development is the catalyst to drive efficiencies and innovation for member firms and their clients.” As stakeholders in the ongoing consultations, CanDeal is a joint collaboration between Canada’s major banks and financial services companies, dedicated to delivering compliant, interoperable solutions to drive higher-performing workflows with market participants.

Mako Fintech Customers Are in Good Shape for Upcoming Regulatory Changes

Evolving regulatory conditions across the financial services industry create challenges for Canada’s wealth managers, especially those in the process of navigating digital transformation and automating their current operations. The new SRO may eventually impact these operational aspects of asset and wealth management:

“To improve client access to products and advice — and in some instances reduce dealer costs — the paper outlined various solutions such as: allowing introducing arrangements between mutual fund dealers and investment dealers, whereby the former contracts out some of its operations to the latter as a way to access back-office and clearing systems; enabling dual-platform dealers to include both types of businesses within one legal entity and integrate back-office functions; proposing rules for centralized client data gathering; and enabling more part-time advisors in all dealer platforms.”

If operational solutions like integrated back-office systems see the light of day, advisors will celebrate aspects like central data gathering; however, these solutions will simultaneously have sweeping impacts across firms who have started digitalizing their back office. Working with a custom automation partner, like Mako Fintech, will allow our customers to easily adapt to upcoming regulatory changes as they unfold. Agile technology that can be configured to the evolving needs of any wealth management professional is needed now more than ever.

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Feature Image: Wikimedia Commons/Jean Gagnon

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So in my view an appropriately diversified portfolio should have enough exposure to different asset classes, that its able to withstand a wide range of market disruptions. Usually, it’s some kind of negative or positive event… they’ll affect different asset classes differently. So by having your eggs in different baskets you’ll be well insulated from major risk. For example, there’s some kind of change in the housing market… both by having some exposure to it, you won’t miss out on the opportunity to make money. But if it’s something negative, you’re also not going to lose all your money if all of it were in the housing market for example. So at a high level, a properly diversified portfolio should grow in a growing market and yet not be at risk of major losses in a declining market.
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You asked also about an efficiently diversified portfolio, and I would say that that’s a portfolio that achieves those goals with a minimum of different positions. There’s a lot of good reasons to have fewer positions in your portfolio. Being less complex means a portfolio is easier to rebalance and administer. Every time part of your portfolio goes up or down, you're going to need to rebalance it a little to make sure that it stays with the right allocations and the fewer positions you have, the easier it is to do that..the less trading fees you incur doing that.
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There is a tradeoff between being completely diversified and being efficiently diversified. If you were completely diversified then you’d have a proportional segment of absolutely everything you could invest in under the sun, like shares of palm oil futures or something like that. I don’t think everyone should have palm oil futures in their portfolio but I’m not a wealth manager. I think it comes down to your portfolio and how large it is (probably the Canada Pension Plan has a proportion of palm oil futures in it). You’re going to have to talk to your advisor and choose a degree of complexity that’s right for your portfolio.
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CN: Let’s just take a step back - what does a typical portfolio look like and has that changed over time?
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RB: Yeah, so I'm not entirely sure what a typical portfolio looks like these days because it's actually changed quite a lot over time. I think common wisdom used to be that the classic balanced portfolio was 60% public stocks and 40% bonds. These days that's ancient history. Most would say that the bond allocation should be a lot lower these days in this age of unprecedented low-interest rates. These days it’s the stock portfolio that’s been driving a lot of the growth. I think a well-diversified portfolio in the modern era should absolutely include exposure to all kinds of alternative assets (that aren't even really that alternative but still kind of fall out of that traditional bucket). So you know I mentioned real estate, private companies, maybe for example commodities or other types of investments. So I think that there are a lot of things that you can invest in and your advisor can guide you on what’s appropriate for you.
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CN: Yeah that makes a lot of sense. Talking about alternative investments, we’ve heard a lot this year about ESGs, impact investing, alternative investments… do you think there’s more of an appetite today for these types of investments than in the last ten years?
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RB: Yeah that’s a topic that’s close to my heart having previously started an impact investment company. It’s definitely been a gigantic increase in interest. I think when I started my previous company we were speaking to large wealth managers and having them say “we’re barely getting a grip on early ideas.” Like not including gun manufacturers or tobacco companies, and now these same companies are launching impact portfolios and marketing this aggressively. So there’s definitely been a seat change, it’s a real industry, and there’s a lot of studies out there and data showing that ESG or impact investing can equal or outperform non-impact investments. So I think it’s a huge part of the market these days. That said, one of the things that’s driving it is people’s interest in it. I think that one of the stories of the investment industry has been the personalization of it. People’s portfolios are being tailored to their own needs and circumstances. Impact investing is definitely a piece of that. People are environmentalists, but an institution is not an environmentalist. It doesn’t live and breathe the impact on the environment the way an individual does. The person who is active in the David Suzuki Foundation for example is going to be active as an impact investor and it’s appropriate for them to be.

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That’s a great question. I think there's a lot of advantages and you gain a lot with an automated platform. For me, it's a lot easier to manage. I have some of my money in one of these platforms and I barely think about it. It's being rebalanced all the time. The costs are much lower in terms of expense ratio for the same kind of rebalancing. Again you're missing a lot with that, but on just the mechanical portfolio rebalancing you're getting a great deal there. I would say that two other advantages are up-to-the-minute reporting, so you always have that login where you can see your position, see how your portfolio is doing historically. And finally, this is an advantage for me and anyone who doesn't love doing taxes, but typically they’ll take care of your tax forms for you, and end up with much simpler tax forms, so it kind of works out what your cost basis was and how much you have to report.
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CN: So let's talk about the other side of the coin then...what are the risks of not having a seasoned professional managing your money?
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RB: I wouldn’t exactly phrase the question that way. You know it's more what’s the benefits of having a real wealth manager? Some of the clients of robo advisory firms may not even be aware that they're missing out. A wealth manager isn't just balancing your stocks and bonds, that's kind of the very lowest mechanical level of what you get out of the wealth manager. Really they're your advisor on your life. Intimately intertwined with you because you're thinking about retirement planning, on planning for college for your kids, when is the right time to buy a house, and when should you get life insurance, for example. An advisor can help you with all of those decisions and they can connect you with service providers like a mortgage broker when you may be in need of one. So I think that you get a lot of value out of having one of these advisers, particularly when you get to a stage in life when these kinds of services are more about the long-term and your life circumstances are far more critical.
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CN: There are clearly pros and cons and two sides of the story depending on who you're asking. Like you said, what stage of their life they’re in ...but do you think the platforms that we’re seeing emerging like to Qtrade, Wealthsimple, and all the rest will ever become status quo?
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RB: Yeah, I do actually. I think that similarly to how you know we’re using online platforms to automate everything for us (I can’t think of the last time I used to travel for example), everything you’re going to be trying to do with your money is going to be automated, and it’s going to be appropriate to be handled by one of these one of these platforms. In particular, for most people at an early stage in their lives that have few assets to manage, not a lot of complexity, not a very extended personal family circumstance, it’s gonna make a lot of sense to have a low fee robo worry about it. But at some point their life circumstances are going to get more complex and you’re gonna get married, or maybe you’re not, or you may have other objectives that you may want some advice on and at that point it may make sense to either supplement the robo advisory portion of your portfolio, or graduate to a more holistic wealth management view.
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CN: Thank you so much Raph, these answers were great. It’s always insightful chatting with you so thanks for sharing those answers with us today.
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RB: It’s my pleasure.

Author: Chandal Nolasco da Silva

Chandal is Mako's VP of Marketing & Communications. She is a dedicated leader who has spent a decade creating recognized B2B SaaS content marketing and SEO campaigns.

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