by The AdvisorAnalyst Writers
Several companies in the financial sector are expressing concerns about potential regulatory changes for segregated funds, suggesting that these could lead to a "financial advice gap". This argument was previously put forward before the imposition of the deferred sales charge (DSC) ban for mutual funds, although it did not prevent the ban's implementation.
A recently published white paper from Primerica brought up the issue again. According to this document, regulatory reforms such as the DSC ban for mutual funds — which is likely to be extended to segregated funds — along with proposed changes to segregated funds compensation, may limit the accessibility of financial advice.
The paper asserted that ongoing discussions in Canada about advisor commissions for mutual funds and segregated funds risk impeding access to financial counsel. This could potentially deter wealth accumulation for a large number of Canadians, particularly those with limited financial resources.
In the UK, where similar regulations have been enforced since 2013, Primerica's report noted a fee increase of 0.25% to 0.5% on assets under advisement, which it attributed primarily to compliance costs passed on to investors. Consequently, fewer firms are now accepting smaller clients.
In contrast, the Mutual Fund Dealers Association of Canada reported that the number of financial advisors in Canada remained stable from 2018 to 2020, unlike the 17% drop observed from 2016 to 2018 due to firms limiting DSC sales in anticipation of the 2022 ban.
As the DSC ban effects subsided by the end of 2020, several major dealers halted new sales of DSC and low-load segregated funds when they discontinued these sales within mutual funds. Furthermore, more Canadians are investing online, as evident by the 172% increase in new do-it-yourself accounts opened in 2020.
Primerica is not the only company appealing to the potential advice gap to counter regulatory reform in segregated funds. It has a stake in maintaining the existing situation. As per Primerica's 2022 annual report, the implementation of a DSC ban and changes to upfront commissions would necessitate restructuring their segregated funds compensation model and could negatively impact the life insurance products they offer in Canada.
By the end of 2022, Canadian segregated funds made up 2% (US$195 million) of Primerica’s investment and savings product sales, and 3% (US$2.5 billion) of average client asset values. The company also has about 10,500 sales representatives licensed to sell segregated funds in Canada.