Fund dealers should encourage their employees to take a portfolio approach when making recommendations to investors. But there are right ways and wrong ways to go about it. The wrong way is illustrated by the Ontario Securities Commission's mid-June settlement with Royal Mutual Funds Inc., the primary distributor for the RBC family of funds. Royal was fined $1 million for providing financial incentives to some of its licensed staff to sell fund-of-funds portfolios instead of other options.
For nearly five years, starting in November 2011, Royal paid higher commissions to its investment and retirement planning (IRP) staff who sold RBC portfolio funds to their clients. These financial planners, who made up about 11% of Royal's total sales force, received 0.10% higher commissions for selling RBC "portfolio solutions" than for sales of other RBC funds and third-party funds that they were also authorized to sell.
What put Royal offside was a sales-practices rule that prohibits fund dealers that sell both proprietary and third-party funds from offering sales incentives favouring proprietary funds. In this instance, the incentives discriminated against not only third-party funds but also most RBC funds. The wider issue, which applies to all purveyors of portfolio funds, is to assess whether a fund of funds is in the best interests of an investor.
