Insurance advisors need to adapt to the world of segregated funds

Earlier this year, the Canadian Board of Insurance Regulators (CCRRA) and the Canadian Insurance Regulators (CCRA) urged insurers to “refrain from making new FAR sales on contracts. separate funds, in accordance with the prohibition of 1er June 2022 in securities, and to anticipate a transition to the cessation of these sales by 1er June 2023. »

Changes in remuneration patterns due to regular changes are not new to the heritage industry, “this is the first time you’ve reached the world of insurance,” says Byren Innes, CEO and consultant. executive at Jennings Consulting in Toronto.

In fact, the insurance industry – including the management of general agents (MGA) and Manufacturers – is working hard not only to ban FAR sales, but also to restrict restrictions or eliminate initial commissions.

The CCRRA and the OCRA stated that they would consult the initial commissions in the sale of separate funds and considered a total ban in order to harmonize the regulations on mutual funds and funds. separate “to avoid any regulatory arbitrage”.

Investment advisers seeking to avoid a ban on FARs for mutual funds have been able to turn to the sale of separate funds, but now “there is no other category of registration possible,” he said. Dan Hallett, Vice President and CEO of HighView Financial Group in Oakville, Ontario.

According to Byren Innes, sales of separate funds with FAR have downgraded, the car of some advisers and the industry anticipated regular changes. “In my opinion, however, most of the sales of segregated funds are through the FAR,” he said.

Investment Executive asked eight manufacturers of separate funds if they planned to end FAR sales before 1er June 2023. It also asked companies and customers to cancel separate funds agreements with existing FARs, with a partial or total exemption from early redemption penalties before the ban date.

Of the six companies that responded, four indicated that they intended to terminate the sale of separate funds with FAR prior to the ban, but did not provide a specific date.

John Killeen, vice president and head of investment distribution at Placements mondiaux Sun Life (Canada), said in a course on the use of the consumer frequency option that it reported a “steady decline” and that the company was developing a plan to end deferred subscription sales sales by June 2023.

Sun Life advisors are no longer selling separate FAR funds, adds John Killeen, and third-party advisors have “continued to reduce their use of FAR funds over time.”

Companies have stated that they are working with customers on the basis of their existing FAR contract terms, which may already allow for early redemptions or the transfer of calendars between mandates without penalty. No company indicated that it would allow redemptions in advance in connection with the planned ban, although many said they were already considering early redemption requests on a case-by-case basis.

Aly Damji, president of HUB Capital à Woodbridge, Ontario, finds that the trend to abandon subscription fees reported in segregated funds is accelerating due to the growing popularity of commission rebilling. By virtue of this structure, it is the advisor, not the client, who reimburses the initial commissions and the client repurchases the fund in advance.

Aly Damji states that he is in favor of the FAR ban, adding that customers “need independent advice, which is the amount of their assets. In eliminating certain initial commissions, customers have fewer options. ”

If regulators move forward with their proposed bans, advisors will have to increase their portfolios or go bankrupt because “their revenues will decline significantly,” said Kirk Purai, president and CEO of Carte Risk Management. , an MGA.

“Advisors need to increase their portfolio to $ 10 million ($ 10 million) instead of $ 5 million,” says Kirk Purai, which is the average size of the portfolio advisory fund portfolio. “For those under $ 5 million, they may have to partner with another advisor and finance their costs one way or another.” »

However, advisers who cling to the FAR and / or the initial commissions do not delay the inevitable, according to Byren Innes.

The era of separate fund sales with FAR “is over – I’m sure,” he says. And if the regulators decide not to ban the initial commissions, “they will have a very limited scope:” You can charge X on this type of fund and Y on this type of fund. ” I don’t think that’s a solution [en tant que modèle économique à long terme]. The solution is the fee accounts, quite frankly, and that’s where the world of mutual funds went. »

Byren Innes suggests to advisers that they envisage a transition to a fee-based model for determining the size of the revenue ils prévoient loses accordingly.

„Portfolio analysis [d’affaires] This is the first step – it’s about determining what the impact will be, and then what strategies to take, ”said Byren Innes.

The next step is to communicate with clients to find out how it is not in the insurance industry, says David Gray, senior consultant at Jennings Consulting. At the end of April, the Canadian Securities Administrators (CSA) and CCRRA released proposals that would improve the total cost statement for mutual funds and segregated funds.

“At the premiere, he chose to be transparent,” said David Gray. No one likes to be surprised. ” and make things move. ”

The elimination of the FAR and a possible elimination of the initial commissions could provide support for new advisors in the even more difficult undertaking for an industry struggling to clothe the next generation.

“You have to take revenge, get closer to a salary model,” says David Gray. This can be seen in many IIROC shops. These include many small accounts, where one or two salaried advisors deal with assets under management, and where these advisors then move on to larger portfolios. »

Cindy David, president and adviser on succession planning for the Cindy David Financial Group in Vancouver, believes that the insurance industry has developed several programs to offer advisors and has a succession plan. And more and more counselors are passing on their business to their children, she says.

A transition from industry to FAR abandonment will be “a good thing, even in terms of practice,” thinks Cindy David. If you have already eliminated the FAR, you already have a good idea of ​​the consequences and you are better able to sit down and think about the best way to serve your client. »

Insurance advisors need to take on the challenge of changing regulations and find ways to adapt their business to better serve their clients, concluded Cindy David. “Is that what I want as a counselor if you can’t find a way to survive?” [aux changements dans] your industry? Really step. »

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