Canadian Imperial Bank of Commerce’s brokerage arm has changed its compensation scheme after employees complained it influenced some advisers to push clients into accounts with fixed annual fees.
CIBC Wood Gundy is reinstating restricted share options for transactional advisers who charge clients commissions for every trade. Until recently, the bonus shares were paid only to advisers on the so-called fee-based model, in which their clients pay an annual fee, usually about 1 per cent of assets.
But some CIBC employees complained to the bank that the structure overly influenced investment advisers to push customers into fee-based accounts, even in situations where the client would be better served by remaining in a commission-type account. In late 2018, CIBC changed its practices, according to confidential CIBC documents obtained by The Globe and Mail.
The change also came after a 2017 compensation review from industry regulators that discouraged financial firms from compensating one type of business model over another.
The bank’s investment dealer subsidiary, which eliminated restricted share awards (RSA) for transactional advisers in 2016, re-introduced that compensation perk for all transactional advisers on Nov. 1, 2018, and closed the gap on certain financial advisers earning bigger bonuses for moving client money into new fee-based accounts over the past two years.
Under the new CIBC program, any investment adviser who produces a minimum of $500,000 in client business qualifies for a yearly bonus in the form of restricted bank shares, regardless of whether that adviser manages a transactional or fee-based investment account.
Transactional accounts require clients to pay a price per transaction, an amount that can fluctuate depending on an investor’s trading activity. Fee-based investment accounts, meanwhile, cost clients an amount that’s worth about 1 per cent of investable assets managed by their adviser. Fee-based accounts offer slightly higher incentives in terms of bonus payouts for advisers – typically 1 per cent to 2 per cent more on certain production levels than what CIBC paid for transactional accounts.
The shift to fee-based accounts has been a major trend in Canada’s wealth-management industry over the past decade as investors have become more aware of the cost of advice. CIBC’s decision to reinstate restricted share options for transactional advisers comes at a time when securities regulators have been paying closer attention to compensation-related conflicts of interest.
Several branches of CIBC employees complained to management about the compensation changes made in 2016, with sources telling The Globe and Mail they felt the changes overly influenced investment advisers to push clients into fee-based accounts. Despite transactional advisers voicing their concerns to management about fee-based arrangements not being suitable for their clients, CIBC refused to negotiate RSA bonuses for those transactional accounts in 2016 and 2017, according to industry sources.
Under previous rules from 2014, fee-based and transactional advisers were both eligible to receive RSA bonuses that ranged from 5 per cent to 9 per cent depending on production levels, according to the confidential document. Then in 2016, the bank eliminated restricted share options for all transactional business.
CIBC Wood Gundy is a part of CIBC’s wealth management division, which manages more than $160-billion in assets. Executives would not say what prompted the change to reintroduce stock option bonus payouts in 2018. The new program now offers between 4 per cent to 6 per cent in RSA accounts for both transactional and fee-based businesses. “We continually review our business and make changes to ensure our clients are receiving the right advice and solutions based on their own unique financial situation,” a CIBC spokesperson wrote in an e-mailed statement.
CIBC is not alone when it comes to increasing efforts to beef up its fee-based business practices. A majority of Canada’s large banks and wealth-management firms have been publicly discussing a change in the way advisers are now managing money. Across the wealth-management industry in Canada, approximately 91 per cent of advisers in the full-service brokerage channel had some assets in non-discretionary fee-based programs as of June, 2018, according to the Retail Brokerage and Distribution report by Strategic Insight. More than half of full-service brokerage assets were in fee-based programs as of June, 2018, up from 29.5 per cent in 2013.
However, for some investors – especially those dealing in new issues or buy-and-hold stock traders – transactional accounts can be appropriate, and shifting them into a fee-based account may lead to clients paying double fees.
In 2016, IIROC conducted a review that included a cross section of its investment firms to better understand compensation-related practices across all business models. The review examined a number of compensation-related conflicts of interest, including a shift to fee-based and managed accounts without appropriate supervision and monitoring of the unique risks associated with them.
IIROC found a significant number of investment firms provide additional incentives to representatives in the form of performance bonuses linked to fee-based assets. When IIROC asked firms to justify this preferential payout for fee-based revenue, most said they “believe fee-based accounts align registrant interests with client interests better than commission-based accounts.”
IIROC declined to say whether CIBC was part of the cross-section review as all internal reviews are confidential. However, in addition to the cross-section review, IIROC does conduct reviews with all investment firms under IIROC membership every one to four years.
“While we don’t speak about which firms we visit and when, we do examine every single firm on a one- to four-year cycle depending on the level of risk. This means that IIROC examines firms that are deemed a higher risk more frequently," IIROC chief executive Andrew Kriegler said. "IIROC-regulated firms must properly manage conflicts of interest – including compensation-related conflicts. As an IIROC priority, we built specific examination modules to test how firms are managing these conflicts,” he added.
Following the review, IIROC gave further guidance in 2017 to its members to make it clear that “if a firm provides any form of monetary or non-monetary incentive in favour of fee-based accounts, those firms must have robust supervisory and monitoring processes in place to ensure that clients are placed appropriately in such accounts.”
Editor’s note: A previous version of the story stated the new program offered between 4 per cent to 6 per cent in RSA accounts for transactional business, and 7 per cent to 9 per cent for fee-based accounts. The new program now offers between 4 per cent to 6 per cent in RSA accounts for both transactional and fee-based businesses.
Clare O’Hara