The Hidden Rot in Your Group RRSP
In June 2018, RBC made headlines when its mutual fund arm RFMI paid a penalty of $1.1 million for compensating their representatives with higher commissions when selling proprietary funds. While given fairly light-handed treatment, RBC’s settlement underscores a structural defect endemic to many of Canada’s financial institutions: conflicts of interest.
This defect is particularly apparent when we look at the investments Canadians use in their RRSPs. More often than not, they are dominated by their provider’s proprietary products.
These funds are essentially investment products designed, developed and managed by financial institutions for the use of clients. Since the funds are managed in-house, they are far more profitable for the institutions offering them than external funds provided by independent firms. As a result of this, the large banks and life insurance companies that service RRSPs are inherently predisposed to promoting their proprietary funds over those offered by other companies.
Some might argue that someone with an RRSP account with a major bank will have access to a wide variety of investments from different fund providers. This is generally true in theory. In practice however, proprietary funds tend to be the dominant element in portfolios that are not serviced by a fiduciary and/or an independent advisor. This is largely due to the fact that the reps that are tasked with advising investors are rewarded for steering their clients towards those in-house funds.
As demonstrated in the RBC settlement, these financial rewards come in the form of higher commissions paid to the reps. The inescapable conclusion here is that the individuals whom investors often look to for guidance, have a personal stake in where their clients place their money. Such unsettling conflicts of interest are by no means a new thing and are certainly not the preserve of the banks alone.
Asides from the ethical challenges posed by these embedded commissions, this system inevitably results in RRSP account holders paying higher fees for funds that are not necessarily superior. On the contrary, it is often the underperforming proprietary funds that feature heavily in the portfolios of retail investors thanks to more aggressive selling efforts. This phenomenon is particularly apparent in Target-Date Funds (TDF) which enable financial institutions to engage in more self-dealing.
A ROT IN THE SYSTEM
What makes conflicts of interest a particularly enduring problem is the scant attention they tend to receive. The relatively few people who are aware of this issue, often view it as part of the game or “the way things have always been done”. And this mentality is precisely what enables this rot to flourish and for Canadian investors to suffer as a result.
The majority of people however, do seem to be unaware of the full extent of this problem. Many investors assume that the reps who service their RRSP accounts are obligated to provide impartial advice that will help them make the most out of their retirement savings. Alas, that is not the case.
It must be said that those reps may very well be conscientious individuals that have the best interests of their clients in mind. It would be a gross overgeneralization to say otherwise. The problem lies not in the individuals but in the defected structure that promotes these conflicts of interests.
WHAT TO DO AS AN EMPLOYER
As a group RRSP sponsor, there are some steps you can take to decrease the likelihood of your plan members falling victim to conflicts of interest:
Conduct a comprehensive plan review no less than once a year.
Benchmark the performance and fees of the funds in use against comparable funds offered by other providers.
Determine the percentage of assets that are held in proprietary funds. If the percentage is higher than 50%, a closer analysis of the funds is warranted.
Contact your plan representative to address under performing and/or overpriced investments.
Reduce the reliance of employees on advice from reps in favor of the services of a fiduciary.
You can also make use of Open Access’ complimentary health check to get an in-depth assessment of your retirement plan’s performance, fees, and governance.
Open Access is a discretionary manager of group retirement plans. Being a fiduciary, we are legally and structurally bound to act in the best interests, and only the best interests, of plan members. This means no proprietary products, no conflicts of interest, and no hidden fees.