Jean (00:02) Hello Andrew, how are you today?

Andrew Auerbach (00:03) I am doing well.

Jean (00:06) Terrific. So in our time today on the podcast, we are going to be talking a little further about the article in the Globe and Mail, it was now just over two weeks ago, in which we were discussing conflicts of interest that can find their way into fee agreements and other client agreements without really the client being made aware of them in a fulsome way.

After that column came out, we received a lot of terrific feedback and we actually did something we normally don't do, that is go into the comments section underneath the article. we were surprised by the people that commented, and clearly they understand the industry, commented and gave examples of other ways in which there can be a conflict of interest in financial services. So in our...

Podcast today, we're going to be looking at those and I guess we could begin with one that I know is really important to you and that is referral fees and in particular in the area of insurance is something that I know you've spoken about.

Andrew Auerbach (01:17) Yeah, absolutely. And maybe an insider's tip, Gene, as you know, when you do an opinion piece, unless you want to cry yourself to sleep at night, don't read the comment section because you're not the only one with an opinion. Everybody, everybody has an opinion. So we basically try and give a good constructive opinion and then we hope there's good conversations afterwards. And, so, yeah.

Jean (01:28) Anyway.

yeah. yeah, for sure.

That's right. Yeah, and in a democracy, there's always room for opinions. But I think that morning when we looked at a few of them, we stopped reading after we got the helpful ones I mentioned, we decided to move on to another task.

Andrew Auerbach (01:50) Yes, indeed. That is that is true. So absolutely, the article did strike a chord. And it's certainly an area that you and I, you know, have very strong feelings about in terms of creating awareness for what conflicts do exist in our industry, and how to keep raising the bar. And part of how to raise the bar is to make sure people are aware and educated on

what these conflicts are and what are the choices and options around mitigating the conflict or eliminating it, which is probably most preferable. And so you've hit on the first one, referral fees. And if I go back to my bank days, the classic adage of compensation drives behaviors. And so every year there would be a very robust process around

defining the compensation program for the following year. And the program was really designed around the priorities of the bank at that time. If they're looking for more or less business in any particular area, they often use the compensation programs as a means to drive that. mean, one example would be in a retail context. There are some years where the bank would prefer to see term, term deposits sold.

That could be for their own funding requirements around how they lend money. Other years, it could be more mutual funds being sold. And so every year in the retail business, they would adjust the dials of those, know, what the scorecard looks like and what the compensation looks like to drive the outcomes that you're seeking. And so in our world, it's very much as we've talked a lot about a fiduciary context. And to us, that means

Jean (03:16) Mm

Andrew Auerbach (03:42) that it's actually a little bit simpler. It's really about what is best for the client we are serving. How do we deliver the services that are in their best interests? And how do we always act for them, only for them, in terms of what our priorities are? And that takes us to things like referral compensation. And referral compensation is really complicated. It's complicated because I do need to make the point that I make often, that is advisors,

overwhelmingly want to do wonderful work for their clients, whether they happen to be bank advisors or boutique advisors, advisors want to do right by their clients, they don't create the playing field. I mean, the manner in which they're paid and the compensation programs, and those things are largely out of their out of their hands. And referral compensation is is one of those areas that we've really sought to completely eliminate at Delisle. And here's why.

Jean (04:22) Mm

Andrew Auerbach (04:40) I'll give you a couple of examples. I think that can actually help illustrate why we think it's important not to have these kinds of compensation programs. Let's talk about insurance and generally the high net worth and ultra high net worth clients end up pursuing insurance strategies that frankly make great sense for their individual circumstances. It could be as an example, an individual that has

a significant amount of gains that will be realized on death. They're concerned of the impact on how to fund those gains and still be able to distribute their wealth in a way they want to. Well, there are a number of insurance strategies that would make wonderful sense in that context to accomplish what the client's looking to do. so tick mark there, great job. An advisor goes through a plan, has a deep conversation, comes up with a strategy. Where things

Jean (05:25) Mm

Andrew Auerbach (05:38) to me potentially can go wrong is when the insurance distribution businesses are in the same organization. And so for example, within the bank, insurance is a very profitable product line for the banks. And therefore they pay incremental compensation to advisors to fulfill these strategies, significant compensation. And it could be

Jean (05:47) Mm

Andrew Auerbach (06:05) hundreds of thousands of dollars of additional compensation based on the fulfillment of these different strategies. So what does that mean? It means to us that there's a potential conflict in that the advisor is being significantly rewarded for selling the compensation. And again, the preface, the advisor wants to do the right thing for their clients. It's a question of really working and advocating.

without conflicts. That is a good example in my mind of where you can see the potential for a conflict. If there's very significant compensation, perhaps an advisor who has a hundred clients decides to put significant focus in insurance strategies for the hundred clients and they organize and prioritize their client base based on insurance needs. They outreach to clients based on insurance needs potentially.

You can see where I'm going with this that creates a conflict in where the advisor is spending their time, where they're focusing their efforts. And again, from a fiduciary context, putting all of their efforts into all of the clients they're servicing. And so it's one illustration of one potential conflict.

Jean (07:17) Maybe for people that are listening that aren't familiar with the industry in the way that you are, when you say a wealth management advisor might get additional compensation for placing an insurance policy, which as you say makes great sense for the client's estate planning needs, taxes on the deemed disposition at death can be very high and it makes sense that insurance is in play.

when you say that they get compensation, what do you mean by that? Do you mean like, you know, $100 gift certificate to Tim Hortons by their manager? Or do you mean compensation that shows up in their in their T4 or their monthly statement that's a percentage of the product? Like, can you just give some more color to that?

Andrew Auerbach (08:07) Yeah, for sure. It is definitely in the latter. It's a big check. They receive cash compensation based on the successful implementation of an insurance strategy. And one of the areas, Gene, that, you know, I've often kind of complained to you about in my, in my old days was the fact that these compensation guides are so big and complicated and they could be 25, 30 pages long.

And so if you're an investment advisor or an investment counselor, let's just maybe take a step back and talk about how you get paid. know, typically there's a number of different ways of how you're going to receive compensation, probably a small salary, probably some kind of a commission or a direct drive tied to the revenue that's being produced. And a whole bunch of other areas that are incremental compensation based on the sales of different types of products.

And that's where things get problematic. And so in my example with insurance, if there's a second, so in my situation, I'm describing, we make a referral to somebody in the insurance arm of the bank. that individual takes over the file, goes through all the work they need to do. They don't necessarily place the insurance policy with their own bank. could, but they generally would shop it and they would go to another, you know, potential provider.

But the fact remains that the insurance distribution arm of that bank is receiving significant compensation when the client decides to proceed with that insurance policy. A percentage, commission, it's usually a pretty complex formula, is paid directly to the advisor for the sale, for the successful completion of that insurance policy. And I've certainly seen situations where that additional compensation

would be a check in that quarter for hundreds of thousands of dollars. And that just doesn't quite sit right with me from a fiduciary context.

Jean (10:12) So wait a minute, I'm not sure I understand. So the need for insurance is surfaced. And then I heard you mention that sort of form of tendering process would occur where this big need is shopped around to the internal insurance people, perhaps to company X and company Y's insurance people, and then they would get a proposal back, is that right?

Andrew Auerbach (10:39) That's right. And so think of the bank, you know, we've talked about, you know, say there's 25 different businesses and each of those businesses have salespeople that have their hands up. Pick me, pick me. I have products that will be interesting to your clients, investment advisor or investment counselor. One of those individuals in the pick me, pick me is somebody working at bank insurance company. And that individual at bank insurance company, they have a con they lobby to the investment

Jean (10:54) Yes.

Yes.

Sure.

Andrew Auerbach (11:09) business to be built into their compensation programs to actually be able to pay the advisor for the successful insurance business. And so the act of making the referral, even if the advisor doesn't actually do the work of going through the process, the advisor makes the introduction to the insurance person who will do what they do, which is they will go through that detailed process. They will look for the best rate across a number of different firms.

They'll place the insurance policy with whomever ends up being the right place based on it. But that introduction, that referral, that act alone is what's gonna generate a significant payment to the advisor or the counselor. And so if you want to...

Jean (11:53) Even if the insurance is not placed by the in -house insurance provider?

Andrew Auerbach (12:01) That's right. Yeah, because the the in -house insurance provider basically will shop for where to place that insurance. And so at our bank that we came from, probably about half of the policies would be placed with home bank. Half of the policies would be placed with third parties, manual life for perhaps another bank's insurance provider, et cetera. But irrespective of where it actually gets placed,

Jean (12:13) Okay.

I see. I see.

Yes. okay. Okay. Simply for the referral.

Andrew Auerbach (12:31) they are receiving a significant payment for that piece of business. And so for example, manual life, manual life will write a big check for placing that insurance policy with B the BMO insurance agent is being paid by manual life in that context. And then

Jean (12:43) Yes, I understand, I get it. So the best policy may in fact be chosen because any way you slice or dice it, any policy that they choose as long as it fits the client's needs, the advisor who has referred the client to insurance will get paid something for it.

Andrew Auerbach (13:06) 100 % right. And so think of the advisor, while they're being paid by home bank, they're basically a sales force for all the insurance companies. And so they're representing everybody, they're getting paid wherever they happen to place that piece of business, it's obviously in the bank's interest to be placing it with home bank. And you know, we can talk about that as well, the notion of proprietary products, which is a separate potential conflict.

Jean (13:13) Yes.

Okay, very interesting.

Yeah. Yeah. Right, right. Well, maybe I can offer up here before we move on from referral fees per se, that the area of the bank that I ran, Wealth Services, we were also...

eager to motivate the sales force and client facing individuals to appoint the trust company as a corporate executor. It's been, you know, years. So of course I forget the details, but I do remember that the the reward or the fee for introducing a client for estate planning and appointing us as the corporate executor.

was far less than fees or compensation for other things that they did. And I can remember many conversations with my team that, you know, there's only 24 hours in a day. And if Ms. Salesperson can get a check for hundreds of thousands of dollars by discussing Product X, insurance might be a good example, or, you know, a $500

And again, I forget the details, $500 for introducing them to someone to talk to them about the corporate executor services provided by the bank. You know, what would any of us do? As you said at the very beginning of this discussion, behavior follows, what is this saying again that you use?

Andrew Auerbach (15:07) The compensation drives behavior.

Jean (15:09) Exactly, yes, compensation drives behavior. whether we're talking about people in a restaurant who are serving food or in a bank, it isn't in any way that we're saying there's a necessarily malfeasance here. It's more just in the size of the institutions that we're talking about and we're distinguishing ourselves from. They're just so darn big and there's so many different businesses within them.

Andrew Auerbach (15:40) Absolutely. I saw this over and over and over again that when you make quote unquote tweaks to the compensation program and so if you're looking for perhaps more sales to commercial banking or more introductions from commercial banking to wealth these adjustments have massive outcomes and so They work they work and that's why it's literally a year -long process of

Jean (15:49) Yes.

They work.

Andrew Auerbach (16:10) this competition for what areas of the bank are we going to focus on this year? And how do we quote unquote, tweak compensation programs in order to affect the outcomes that we want for the bank? There's nothing wrong with that. I mean, that of course is what the bank is doing. It says you've pointed out many times as sales organization that wants to maximize revenue across all their business units. It's just takes us back to where we started in a fiduciary context.

It creates potential distractions and at worse, could pull behaviors in a way at the expense of other behaviors that, frankly is where we should be focused as a fiduciary.

Jean (16:50) And wealth clients that are placing their money for investment, it's hard to say that it's a good idea to be part of that, to be at a place where there are no referral fees, such as what we're talking about. It's just a better situation for them. In our last conversation about this, when we were first talking about our Globe article,

we referred to the ethics questions on exams, right? And whether it's law or whether it's a chartered financial exam or whether it's a registered psychotherapy exam, often those questions are, you it's obvious. The right answer like jumps out at you. And in other questions, it's kind of like, you know, it's hard to say. And I think that's the point we're making is that when you get into the kinds of things that we're talking about,

Again, there's nobody purposefully doing anything wrong. It's just when you really look at it from the client's perspective, it's not in their best interest.

Andrew Auerbach (17:50) I think even further and I, know, to your point in those ethics exams, the answer, the best answer is eliminate the conflict. And so if you, if you don't make payments for insurance and you do expect this is part of your job, we should provide planning, make recommendations, introduce great people to help provide other solutions, just not get paid, just not get paid extra for it. You know, creating a potential conflict. That's kind of where

Jean (17:59) Yeah.

Yeah, those things are all great.

Right.

Andrew Auerbach (18:19) where we would advocate it, it seems clearer. And you know, those exams you describe, the answer was always, okay, I've got two choices. You know, the CFA requires X, my employer requires Y. There are different requirements for the same rule. Let's say, trading, personal trading as an example. The answer is always pick the more restrictive one. That's always the answer, right? The answer is which one's more favorable to the client? Pick that one.

Jean (18:43) Yeah. Right.

Andrew Auerbach (18:48) That's the one you need to go with. So that's kind of where we're pressing.

Jean (18:49) Yeah, right. Yeah, exactly. Well, maybe we can move on to something else that has been raised since our article. And that is the idea of people departing a company, departing an employee, a bank, whatever it might be, to go to another employer, another bank, perhaps a brokerage house of which there's several large ones in Canada. And on that move,

receiving a significant payment in the hopes that many of the clients will go with that advisor. Can you speak to this and your thoughts on it?

Andrew Auerbach (19:29) Yeah, absolutely. This is another area that clients simply aren't aware of how it works. And we would argue that it's outdated in terms of how these sorts of things work. And so this is more typical in the brokerage world. Let's say you're at a bank owned broker and you decide to move, whether it's to another bank owned broker, or perhaps it's to an independent brokerage firm.

generally what happens is you are paid to, make that move and effectively it's a multiple of the revenue of the clients that end up following you. And so for example, if you're a producer, who generates, let's say an advisor generating $2 million a year in annualized fee revenue.

If all of that advisors clients follow them to the new firm, they are paid as they would normally be paid a commission grid, that sort of thing. And they're given a bonus of up to 1 .5 times, sometimes more even of that revenue. And so to be clear, that's a check for $3 million for making that move. That's a bit conflicted in our minds for

explaining to clients the benefits of why you're making the move. That's a big personal benefit. You're receiving a very significant check to move. And sometimes you'll hear in defense of that, well, you know, there are cashflow implications when you make a move, not all your clients are going to follow you, et cetera, et cetera. But I don't buy it's a $3 million cashflow. That's a massive, massive payout. And it does create

potentially motivation to move for the wrong reasons. I'll give you a, at its worst, a term that is used sometimes called double dip. And as unpleasant as that sounds, it's basically an advisor who leaves one brokerage firm, goes to another brokerage firm. In my example, the $2 million producer, they get paid a check for making that move. Then

Jean (21:49) Mm

Andrew Auerbach (21:53) they retire, let's say five years later, and guess what they do? They sell their book to another advisor for basically the same valuation. So a double dip. So basically they do it twice, they get paid twice. And I don't believe clients really understand how this all works. And it's something that I think we should talk about more and be more transparent.

Jean (22:16) Well, I think we know from our personal lives that clients, even sophisticated ones, absolutely don't know. mean, how many conversations or I mean, it's not been a ton of conversation, but certainly several come to mind where someone, a friend has told us that their advisor has moved from here to there. And, know, in answer to our question about, you know, you've moved with them and...

what did they say to you in explanation for their move? well, much better technology, much better technology or anything else. Well, yes, et cetera, know, different products or I didn't like the bank, anything else? Yes, this is much better for you. And it doesn't really matter how many times we gently ask, did they mention anything else? They never say, yes, he also mentioned he would get a 1 .5.

Andrew Auerbach (22:54) The bank's making me sell products, all these kinds of things, which are probably not entirely accurate. Yeah.

Jean (23:12) times check for the revenue that he makes off of us. So yeah, you know, it's, it does and that phrase double dip is even more unsavory, but that's certainly something that we feel strongly about. You use the phrase independent brokerage houses and banks and of course at Delisle, we're a boutique wealth management firm, sometimes called a portfolio management firm in the business. How does a client

Andrew Auerbach (23:24) Mm -hmm.

Jean (23:42) know what a what is an independent brokerage house look like or in Canada sound like.

Andrew Auerbach (23:52) Yeah, and it's a great question. And part of it is the complexity of how the businesses have evolved. I mean, most of the assets today exist within brokerage firms. And so they were largely independent brokerage firms till about two decades ago. And then the banks basically bought most of the brokerage firms. So most of the brokerage firms are bank owned, RBC, Dominion Securities, CIBC, Wood Gundy, BMO, Nesbit Burns,

These firms used to be independent, a Nesbitt Burns or a Nesbitt Thompson, Burns Fry, Dominion Securities, on and on. There are now a number of independent brokerage firms, firms like Richardson Wealth, Canaccord, Wellington Altus, are a few of the firms that come to mind. Harborfront would be another. The models are very, very different.

between investment counseling firms and brokerage firms. And this is another area that we feel clients should be aware of what those differences are. And we argue in that article that irrespective of whether you happen to deal with an advisor at a brokerage firm or you happen to deal with a client with an advisor at an investment counseling firm, we argue there should be more harmonization of these compensation programs. They should look more similar for clients who are fully discretionary.

who are truly in a fiduciary relationship with their advisor.

Jean (25:25) Right. And just to clarify for people that are listening, when you say investment counseling firm, you're really referring to a firm like ours, although we usually use the phrase boutique wealth management firm.

Andrew Auerbach (25:38) That's right. And so there are really two channels in registration. There is the brokerage world, which I've described, which is regulated by a self regulatory organization called Ciro. It used to be called IROC and it IROC consolidated with the mutual fund dealers association to become Ciro or an investment counseling firm, which is regulated directly.

by the provincial securities commissions. so those are two very different tracks. Portfolio management firms, investment counseling firms, boutique wealth management firms, these are generally interchangeable terminology, which can be confusing, but they are quite different in terms of how they get set up, how they work, usually how the advisors are paid within the firms. There are a number of

pretty significant differences between the avenues.

Jean (26:40) Right. Okay, well I think we've covered really most of the things around conflicts of interest that we have wanted to cover. I'm sure it's a topic we will discuss again in the podcast. But unless you have something further you'd like to add, Andrew?

Andrew Auerbach (26:57) Yeah, I think that first of all, I'd add there's a couple of others I would just point to in this in this category. One is reward trips, a legacy of the past, which is still alive and well, the idea that the advisors are ranked relative to the amount of revenue they produce and go on different types of trips. And so the top revenue people would go on.

big, big trip typically called something like Chairman's Council. And the next year would go on something likely called President's Council and on and on. And so this idea of ranking and going on different types of lavish trips based on the amount of production is a bit of a legacy of the past. That was very common in brokerage firms as pure sales organizations. I think now in this fiduciary context of being much different as a business.

probably an area that we will continue to look at. The regulators have actually looked at this in the past. They, through the most recent changes, through client -focused reforms, introduced a number of specific criteria around things like misleading titles. And as an example, those reward trips, if you were a top revenue producer at the highest reward trip, you would be allowed to use fancier titles, titles like Senior Vice President, as an example.

kind of misleading because you're not actually in a management capacity of the firm. You have that title because of the size of your book effectively. And so that's been done away with the regulators very recently over the last couple of years have done away with that where you you can't use titles like senior vice president. If you're not actually leading a team of people in a management context, and I think those are welcome changes. I think we're going to see more more and more of them.

And I'm just gonna close where I began on this one, which is, yes.

Jean (28:54) Can I just say something on that though? It's interesting to me that the client focused reform committee, and I'm sure it was a lot of work and all of that. It's interesting that the change you mentioned they made really doesn't affect the pocketbook of the customer or their client. It might make them think they're dealing with a senior vice president as opposed to someone else, but that's not like some of the other matters that we've discussed that.

truly are situations in which the customer or client is paying for something that they're really not aware that they're paying for, such as the lavish trips, the referrals to other parts of the bank and so on. It seems like fairly low hanging fruit, I guess is what I'm saying.

Andrew Auerbach (29:35) Yeah, no, that's right. And I think.

Yeah, and the regulators, to their credit, are very focused on things like disclosures and making sure that there's more transparency. The challenge is people don't read the disclosures. They don't read big documents. They're hiring people, so they don't have to read those things. And it's a slow journey. I think one of the things we're trying to do is just make sure people are aware of these things and have the conversations.

Jean (29:52) Right.

Andrew Auerbach (30:07) Frankly, why we feel there should be more boutique wealth management firms is more options and more choice. We have very purposefully built our programs to address these conflicts largely with the ethics bias of eliminate them. Like basically just not worry about the disclosure, just don't have it. Don't manufacture products, don't rank people for reward trips, don't pay referral fees, these kinds of things that we think just get in the way.

Jean (30:26) Right.

Don't have five, in other words, don't have fine print that, you know, we're really expecting the client not to read. Just don't have it. Just don't need it. Right.

Andrew Auerbach (30:43) Just don't have it to act as a fiduciary and raise the bar. And so we work for clients. We have a fee schedule that is transparent and that's about it. We pay people in a one page compensation program that's very clear and easy to understand. Just don't have it to your point.

Jean (31:01) Yeah, the what do they call it? The kiss principle. Keep it simple, stupid.

Andrew Auerbach (31:05) Exactly.

Jean (31:07) Anything else?

Andrew Auerbach (31:09) No, I think that was a pretty broad overview. It's a topic that we could keep going on. But I think this is a good flyover of a number of the areas that can get in the way.

Jean (31:14) Yeah.

for sure. Okay, terrific. Thanks so much. Bye.

Andrew Auerbach (31:24) Thanks, nice talking, bye.