Making the Switch to IIROC

When Matthew Paradis wanted to expand his business last year, there was only one option he and his partner considered – join an IIROC dealer and leave their MFDA days behind. The Orleans, Ont.-based advisor, who’s been working with mutual funds for six years, said the decision to switch self-regulatory organizations was an easy one. Unless he was able to sell securities and bonds, he couldn’t offer clients the best service.

“For us to be able to say we considered everything was huge,” says Paradis, CFP and co-founder of AdvisorPractice.com.

Changing affiliations is something many advisors have to think about at one point or another, though Connie Craddock, vice-president of public affairs at IIROC, says no firms have switched memberships in the last 12 months.

Advisors, however, are joining IIROC firms all the time. While there’s no official tally, Kevin Whelly, head of recruitment initiatives at Raymond James, says about a third of the 80 advisors they hired in 2009 spent some of their careers at MFDA operations. The lure of the IIROC life is understandable – being able to offer clients more than mutual funds can increase an advisor’s customer base, not to mention revenues.

But it’s not for everyone. Changing dealers is a lot of work – training courses, paperwork and moving clients from one platform to another. The whole process from start to finish takes about a year.

“The ones who switch tend to be those advisors getting to the more senior part of their career,” says Whelly. “They’re losing their higher-net-worth clients to other IIROC advisors.”

The simpler MFDA world, he adds, is a great entry point where people can learn their trade. But advisors must keep an eye on how their clients’ needs change.

Slow change

For Paradis, the work started as soon as he and business partner Robert Abboud decided they wanted to change SROs.

Being an independent shop meant he had to find a dealer with IIROC ties. That involved interviewing various firms and narrowing down his choices. Paradis wanted to join a company that had a good reputation, a proven track record, was big enough to have similar services to a bank, and respected his independent status. After a few months of searching, he and Abboud chose Raymond James. But before he signed on the dotted line he sent the company a long questionnaire, and they sent one back.

“There’s due diligence on both parts,” says Paradis.

Many advisors won’t have to worry about finding a dealer the way Paradis did – instead they’ll simply get a new job at an IIROC firm – but there are still tasks that need to be completed before securities can be sold.

Advisors will have to take the Canadian Securities Course, the Conduct and Practices Handbook Course (CPH) and then a 90-day training course, usually given by the dealer on behalf of IIROC, on offering new products, new computer systems and researching equities. That alone can take about 12 months to complete, says John Kelleway, regional vice-president at DundeeWealth.

Perhaps the most time-consuming task for advisors is moving clients from one SRO to the other. It can take months, and involves a lot of paperwork depending on the book size. While dealers can help with the process, it still falls on the advisor to make sure it gets done.

Kelleway admits it could take two months or more to get clients transferred over, as advisors basically have to sign their clients up from scratch, starting with a new Know Your Client form. Then the advisor has to take all the clients’ “off-book” investments – or assets held at the fund company, which is how the MFDA operates – and move them to their new dealer, which holds the assets “on-book.”

Whelly says an entirely new set of documents, for every client, is needed. “You have to transfer every position the client held,” he explains. “That can take a few months for each advisor.”

It shouldn’t take that long if the dealer has the resources to help. Whelly points out that Raymond James has years of experience moving clients from one platform to the other. Because Dundee has MFDA and IIROC advisors, Kelleway adds there are people whose job it is to transfer accounts between the two SROs.

Despite the help, it’s still time-consuming. After all, ex-MFDA advisors can still sell mutual funds during the transition period; so people are often working, taking the 90-day training course and moving clients to IIROC all at the same time.

Luckily, there is a light at the end of the tunnel. In fact, IIROC advisors often have less paperwork to do when it’s all said and done.

Paper trail

Kyle Brodie, supervisor of transition and training at Worldsource Financial Management, explains that MFDA advisors have to get a client’s signature for every trade they make, while IIROC advisors can do business over the phone, as long as they get verbal confirmation.

That’s because of the on-book, off-book difference. In the case of the former, clients have to fill out one form for the dealer and that’s it. In an off-book situation investments can be held with various companies, so the signature is required. That doesn’t mean advisors are exempt from documenting every conversation – if anything, the lack of signatures can mean keeping track of communications is even more important, and potentially more time-consuming, in the IIROC world.

And, there are yearly requirements too. Advisors have to inform IIROC if anyone has filed complaints against them or if they’ve committed any criminal acts. Like pretty much everything else, that’s administered through the dealer, the advisor may never have any direct contact with the regulator.

Even with the regular updates and documentation requirements, Brodie says advisors will be able to spend more time with clients and less of their day buried under documents. “The systems in place are very efficient,” he adds, explaining his other reason for becoming an IIROC member: All he has to do is explain the trade he wants to make and record it in the client management system.

“I write down who I talked to, what investment they were moving into and why, and that they’re okay with the trade. I literally right click on CI, for example, go to sell and then buy with Mackenzie.”

Selling securities has its own rules, but Paradis says the regulation requirements aren’t overly challenging. Still, advisors have to make sure their clients, who can now start asking for specific stocks in their portfolios, don’t work at that publicly traded company.

New choices

Advisors also have to stay on top of a lot more products.

Caroline Sixsmith, VP of operations at Worldsource, says it generally takes about six months from when people become an IIROC member – the first part spent in the 90-day training course – until they start feeling comfortable selling stocks.

Her firm offers advisors ongoing training seminars so they can learn about different offerings. Dundee’s Kelleway adds that the process is gradual: Advisors continue to sell mutual funds, then slowly introduce new products. “Bonds and fixed income usually come first,” he says. “Then preferred shares.”

Although the overall workload may not increase, becoming an IIROC advisor is no walk in the park.

So what’s the payoff? Not much, if the IIROC advisor’s book of business doesn’t change drastically from his MFDA days. In fact, there’s a good chance they’ll make less money. That’s because the dealer, which offers various courses, does a lot of the regulatory paperwork and pays its advisors membership fees, generally takes a larger chunk of money.

Paradis used to pay a flat fee every year to his MFDA dealer, but now Raymond James takes a commission to cover its services. “It’s more expensive,” he says.

Factor in some other costs, such as signage changes, new business cards and stationery, which could cost a few thousand dollars, and the costs add up. ButParadis hopes being an IIROC member will pay off in the long run. “We think we can offer better things to clients and that will help us grow our business and the efficiencies will give us more to grow,” he explains.

Fee factor

Sixsmith takes a different view. She doesn’t think fees are more expensive, because her company gives advisors options as to how they make their money. They can either charge a commission or a monthly or quarterly fee.

The Worldsource executive argues advisors who sell mutual funds charge management expense ratios that are more expensive than IIROC options. Her fee-based advisors, she says, have to make their mutual funds F-class, which isn’t attached to hefty MERs. In any case, accessing the IIROC platform is generally more expensive because of the software that’s used.

“You’re paying for access to security quotes,” says Brodie.

IIROC’s Connie Craddock says the SRO’s annual budget is about $80 million and it’s all funded by firms, with dealer membership fees varying by firm. Fees can start from a minimum of $15,000 or $25,000 a firm depending on the amount of regulatory resources required, she explains. On top of that, other factors that affect the annual fee include the size of the firm’s capital, the number of registrants and firm revenues. IIROC also charges the marketplaces it regulates a fee for the cost of regulation.

Over the last couple of years IIROC’s membership has stayed relatively stable, bouncing between 195 and 210 firms. Of course, no matter what the fees, dealers – and the advisors they employ – won’t refuse to pay. If they want to sell securities, they have no choice but to become an IIROC member.

“We still use the word membership, but they’re not voluntary members. They have no choice,” says Craddock. “That said, we have worked hard to manage costs. Over the past two years through cost control and productivity gains, we managed to return $5.4 million to the industry and last year we actually decreased fees by more than 2%.”

Paradis and Abboud aren’t worrying too much about costs, they’re busy trying to pass the 90-day training period, which involves about eight tests including how to cash a cheque with a new dealer and how to use the computer system.

When they’re ready to sell securities, Paradis expects he’ll have 20% more time to adapt his clients’ investing needs to the new platform. He’ll still need to learn a few things about the products he can sell, but he’s adamant his clients will benefit in the end.

“We didn’t have the option to consider everything that was out there,” he says. “Now we can say we looked at everything and still believe this is the right way to go.”

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Bryan Borzykowski is the Senior Editor at Canadian Business Online.

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