A review of dealers’ policies on promotional incentives reveals gaps and shortcomings
Mutual fund dealers must step up efforts to prevent potential conflicts of interest when fund companies provide reps with promotional incentives, such as trinkets, events and even donations to reps’ favourite charities, says a new report from the Mutual Fund Dealers Association of Canada (MFDA).
The MFDA published a report today that details the results of a review of dealers’ policies for overseeing reps receiving promos from mutual fund companies, which could create conflicts of interest.
According to the report, while most firms have policies that address these issues, many policies are either incomplete or need improvement.
Dealers’ policies varied in “the level of detail and criteria for acceptable activity,” the report says. “While some [dealers] had comprehensive policies, in general, [dealer] policies were not sufficiently detailed to provide adequate guidance to their advisors.”
For instance, the MFDA says that, while some firms put annual limits on the value of promos that reps can receive from fund companies, dealers should also have limits that apply to each fund company to prevent the risk of a rep being “improperly influenced.”
It notes that while some firms don’t require reps to report items of “nominal value,” dealers should be aware that reps could receive items so frequently that a conflict could result. “In such cases, the [dealer] should consider requiring reporting of these items and including them in assessing compliance with their limits,” it says.
The report also flags the risk of conflicts being created when reps solicit charitable donations from fund companies, even when reps don’t get tax credits or other financial benefits from the donations. For instance, the rep could gain non-monetary benefits, such as good publicity, from fund company donations.
“While we support the philanthropic efforts of advisors, there is a potential conflict of interest if it could be viewed as a ‘quid pro quo’ situation,” the report says. “In other words, the circumstances may make the mutual fund company feel obligated to pledge a donation in order to retain or gain business, and/or advisors may be unduly influenced in the investment advice they give to their clients.”
Given these risks, the MFDA says that both dealers and reps should be aware of the potential conflict, and that firms should police these kinds of donations in the same way as they oversee promotional activity.
“Besides the size of the donation, [dealers] should also consider the charity’s size and track record, any ties to the advisor, if it is a direct donation to the charity or a payment or gift to an event being held to raise money for that charity, and the manner in which it is presented to the charity,” it says.
Additionally, the MFDA says dealers should help reps avoid violating their policies in this area, for example, by warning a rep who approaches its annual limit on promotional activity. And, when reps do violate their dealers’ policies, consequences should result, such as “restricting the advisor from engaging in future promotional activity or other disciplinary action.”