🏦 know your product

collusion in real-time

Oct 3, 2021

👀 Canadians can watch collusion in real time.

Many banks have now stopped making non-bank investment funds (ETFs, mutual funds, etc) available to their clients through their investment advisors. You can only invest using their funds.

This undermines the viability of independent funds in Canada and could increasingly centralize access to capital.

Rob Carrick @rcarrick

Big bank policy on third-party funds sabotages advisers and serves investors badly

Big bank policy on third-party funds sabotages advisers and serves investors badlyThree big banks are degrading the brand of advice by effectively turning their planners into sellers of bank productstheglobeandmail.com

While this behaviour *is* anti-competitive (it’s exclusionary), it comes as a direct response to recently updated rules about what an Investment Advisor needs to know.

The regulator (the Mutual Fund Dealers Association) wants Advisors to be well-informed on investment products, but probably doesn’t (or didn’t) want to give banks a reason to be exclusionary. And the Chair of the Canadian Securities Administrators is not pleased.

Report on Business @globebusiness

Banks cannot cut off third-party funds for clients, head of securities regulators group says

Banks cannot cut off third-party funds for clients, head of securities regulators group saysSeveral banks stopped sales of third-party investment products earlier this year after securities regulators announced plans to roll out new client-focused reform rulesdlvr.it

TD Bank seemed to be the first mover, acting as a provocation mostly in protest of sorts. LOL at the move having “minimal impact.”

Report on Business @globebusiness

TD Bank says plan to halt sales of third-party funds will have minimal impact

TD Bank says plan to halt sales of third-party funds will have minimal impactThe decision to no longer sell third-party investment funds was not a ‘dramatic move’, said the head of TD’s wealth management divisiondlvr.it

It makes sense that banks would *prefer* that you buy their funds; but as long as they are charging trading fees, they are able to earn a profit as long as people are buying and selling.

The thing is, trading fees are in a bit of a race to the bottom. National Bank went to a zero trading fee model back in the summer, calling it “the most competitive online brokerage fee structure in the Canadian market,” during their Q3 earnings call.

From an article in the Financial Post:

The rest of Canada’s Big Six said that they are not feeling any pressure to follow the National Bank. But TD Bank “has the most to lose” since commissions comprise about two per cent of its revenue and about four per cent of its earnings, according to National Bank analyst Gabriel Dechaine.

While the self-preferencing is a response to a higher “Know Your Product” threshold that is ironically intended to better protect consumers, it’s a convenient reason for banks to limit their investment offerings amidst downward pressure on trading fees.

Wealthsimple is at 0, and a bunch of US players like Fidelity, E-Trade, and Vanguard are also commission-free. This trend may create pressure for Investment Advisors to nudge clients towards bank-driven funds.

The increasingly centralized control over capital formation among the Big Six incumbents is remarkably anti-competitive. You need capital to simply begin to transform ideas into business opportunities - let alone scale the growth of new entrants.

Share regs to riches

🏛️ regs

New rules (“Client Centered Reforms”) from the Canadian Securities Administrators related to “Know Your Product” or “KYP” seem to be the catalyst for this change.

The amendments prescribe the following obligations with respect to KYP:

Registered firms should establish a KYP process that works for their business models while ensuring that all securities that they make available to clients are assessed, approved and monitored on an ongoing basis for significant changes.
Registered individuals must not purchase, sell or recommend securities to clients unless reasonable steps have been taken to understand the securities and have obtained their firms’ approval before doing so.

Designed to better protect investment clients from the self-interests of their advisors, these new rules are perversely allowing banks to limit their investment options.

🤑 riches

As upstart competitors seek to win market share through 0% trading fees, banks are under increasing pressure to charge less for the management of their funds; meaning their source of revenue is limited to trades. This has implications for independent mutual funds like: Mawer, Leith Wheeler, Beutel Goodman, Steadyhand, which will be even less accessible.

Limiting investment options to the bank’s proprietary products is a form of self-preferencing. It’s a blatant response to these new rules, and could future enrich the Big 6 at the expense of investor choice.