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By Shehryar Khan, CFA | 06-26-2018

RBC to pay $1M in fines over commissions on house funds

Investors need to ask their advisors how they are compensated, and whose interests are served by investment choices.

Shehryar Khan: In a settlement agreed to this week between Royal Mutual Funds and the Ontario Securities Commission, Royal Bank agreed to pay just over $1 million dollars in fines for engaging in practices that violated regulations regarding the sales of proprietary funds. In a nutshell, Royal Mutual Funds paid higher commissions on the sale of a certain subset of RBC funds than for other RBC and non-RBC funds, which is against the rules.

RBC is just the latest large firm to be fined for their sales practices. Both 1832 Asset Management and Mackenzie Investments were fined in April, and last year Sentry Investments was fined and Sean Driscoll stepped down as CEO.

In 2016, Morningstar Canada’s manager research team awarded RBC Global Asset Management an award called Steward of the Year, an award meant to recognize initiatives by firms that put investors' interests above their own. The award in 2016 was for the fact that RBC announced sweeping price cuts to their funds, and did away with high-net-worth pricing, treating investors of all asset bases the same way. This was, and still is, something to be commended. Needless to say, we did not know of RBC's sales incentive program at the time. While the incentive was only 10 basis points higher, it resulted in more than $24 million dollars in additional compensation over a 5-year period, ending in 2016.

For investors, the hardest part here is figuring out how to know if their investment advisor is choosing securities for them because they genuinely believe they are the best option, or because they gain from having their clients choose those products. The best way is to ask hard questions: Investors should ask their advisors how they are compensated, whether they are receiving any compensation from investment firms for choosing certain products over others, and whether their advisor accepts gifts and entertainment from investment firms.

While you may not like what you hear, it will help you in determining whose interests the advisor is serving with their recommendations. Asking these questions isn’t comfortable, but at the end of the day, it is your hard-earned money being put to work, and you have every right to know why anyone is suggesting you choose a certain product to trust your life savings with.

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