Big banks’ sales targets may influence mutual fund advisers’ product recommendations, review finds

Open this photo in gallery:

A regulatory review of the sales practices at Canada’s Big Five banks found that mutual fund advisers face a high degree of pressure to meet sales targets, which can lead to products or services being offered that are not in the clients’ best interests.

In a joint statement on Wednesday, the Ontario Securities Commission and the Canadian Investment Regulatory Organization said that while there were some “positive perceptions” in their examination of the sales culture at Canadian banks, they did identify several areas of concern. The survey focused on sales pressures, the range of products available for customers, advisers’ knowledge of products and services, and compensation models used by the banks.

The OSC and CIRO found that 24 per cent of individuals who sell mutual funds said clients “have been recommended products or services that are not in their interests” at least “sometimes,” while 33 per cent reported that clients “have been provided with incorrect information about products and services being recommended to them.”

“While it’s clear many bank representatives are prioritizing quality advice, it is also clear that sales pressures and incentivization may be driving concerning behaviours,” OSC chief executive Grant Vingoe said in a statement. “The focus of the bank representatives should be the best interests of their customers and clients – not feeling heightened pressures to meet sales targets.”

Investor advocates urge regulators to ban controversial sales commissions for mutual funds

Both CIRO and the OSC said they believe the banks’ sales environments, compensation, incentivization and performance tracking may be contributing factors to these results.

The review was prompted by a media report from the CBC in 2024 that revealed investors were facing potential harm owing to alleged high-pressure sales practices for banking products and mutual funds at some Canadian banks.

The regulators’ survey was conducted at the end of 2024 and included 2,862 representatives from all five bank-affiliated mutual fund dealers in Ontario, which include: BMO Investments Inc., CIBC Securities Inc., Royal Mutual Funds Inc., Scotia Securities Inc., and TD Investment Services Inc.

Some responses showed positive results – particularly that advisers felt the range of products they are able to offer is satisfactory for their clients.

However, more than half of advisers surveyed said “scorecards” – a common tool used by the banks to track adviser performance against job targets – add “significant” pressure on them to increase sales, while 40 per cent said the scorecards influence the product and service recommendations made to clients.

“This poses a risk to the interests of retail investors,” the review said.

Given these survey results, the bank-affiliated mutual fund dealers should conduct an assessment of their sales environments, the OSC and CIRO said in the report.

The regulators did not provide policy recommendations to the banks but said they will continue to examine their sales practices in a second review. Upon completion of the next phase, the regulators said they will “determine whether further action is required to ensure ongoing compliance with securities law.”

The next phase will take a deeper look at scorecards and the controls the banks have in place to address possible conflicts of interest that arise from sales practices.

One unnamed bank adviser quoted in the survey said they feel “pressured at work to make sales that aren’t always suitable” for the client.

“This needs to change, as the practices are creating unease and anxiety for myself and clients,” the adviser wrote.

Opinion: Don’t let Bay Street turn you into a gambler

The OSC and CIRO review isn’t the first time that sales practices at Canada’s biggest banks have come under scrutiny.

In 2018, a review of the sector by the Financial Consumer Agency of Canada found that bank branches have become more like stores that sell advice and investments.

As a result, Canadians could be sold unsuitable products, and the banks’ efforts to prevent that are insufficient, the FCAC said in its report. That probe was initially prompted by a CBC investigation in 2017 into bank sales practices.

In June, 2023, The Globe and Mail examined how the sales culture at Canadian banks subjected branch advisers to hitting sales targets, which can put their own interest at odds with the clients’.

Many of Canada’s big banks have also faced criticism for removing independent companies’ mutual funds from the product shelves of their in-house financial planning divisions.

In 2021, Ontario’s Finance Minister called on the OSC to conduct a review of several Canadian banks that had halted sales of third-party investment funds. That review was completed in early 2022 and submitted to Finance Minister Peter Bethlenfalvy. The findings have not been made public.

When asked about third-party funds in the 2024 survey by CIRO and the OSC, nearly 80 per cent of bank advisers said their current range of products meets the needs of clients. However, almost half of advisers agree that clients would benefit if they could be offered a broader range of mutual funds, including non-bank funds.

“The results from the survey identified areas where more work is needed and we appreciate the co-operation and willingness of the banks to participate and share our ambition to do what’s right for investors,” CIRO chief executive officer Andrew Kriegler said in a statement on Wednesday.

One area the banks should assess is their current training programs, the survey said.

The OSC and CIRO found that 23 per cent of mutual fund advisers were not able to identify the definition of the term “management expense ratio,” or MER, which identifies the total cost of investing in a fund. The report says that “relatively more” advisers – about 88 per cent – were able to correctly identify the impact of the MER on mutual-fund returns.