Where Should CIRO Focus to Improve Canadians Financial Futures?

The Canadian Investment Regulatory Organization (CIRO) began regulating all investment activities in Canada in early 2024 replacing two self-regulatory organizations. CIRO oversees

• investment products offered for sale and the companies which can offer them,
• how those products are marketed to the public, and
• the operational and control capabilities of companies offering those products or helping to market them.

CIRO has broad responsibilities and powers to back up their responsibilities! They are clearly a very important player in this market.

From their website, CIRO’s Vision is to “Be an agile and trusted regulator who helps the investment industry deliver the right financial outcomes for investors.” As documented in other articles on this site, previous regulators made changes which have provided significant benefit to the banks and their associates companies, but fewer benefits to investors. We are hoping that CIRO will be different.

Here are some thoughts as to areas that CIRO might place under scrutiny…

Cost versus Returns

Anyone who has taken management courses or worked in management knows that the key consideration of any potential investment by a business is the rate of return (RoR). The investment doesn’t matter as much. Investment options are prioritized based on the ones offering the highest return. The rationale is simple. Costs are one-time, while returns recur every year!

Yet, once we return to our private lives, most of us forget the wisdom that returns matter more than costs. This is a HUGE opportunity area for CIRO to improve the financial future of Canadians. So how are they doing so far?

In late January, 2025, my company distributed the following email, which I have edited only to remove the company name, as they do not support the positions I take on this website. (For clarity, FEL used in the quote stands for Front End Load, the industry’s term for a commission paid at the time of purchase of an investment)

In response to a recent audit conducted by The Canadian Investment Regulatory Organization (CIRO), we are required to mandate:

• A 2% limit on all FEL fees
• A detailed justification must be provided by the Approved Persons (APs) for any FEL fees charged above 0% (not to exceed the 2% limit). FEL fees that do not provide a suitable justification will be rejected. 

The fact is that CIRO is still laser focused on one-time costs, NOT on annual returns! CIRO seems to allow selling junk investments to clients (such as growth mutual fund portfolios averaging 6% a year when other funds average 12% and higher) just so long as you don’t charge the client for the transaction! 

Implications of CIRO’s Position on Small Investors

The remainder of this article depends on an understanding of how the advice industry gets paid. If you’d like a refresher, please see the article on Advisor Compensation. 

The investment operations at the bank branches has not been negatively impacted in any way by this position. In the long-term, this position is VERY good for them, as will be described below.

The large investment houses that make their money by charging an annual fee (0.5% – 1.5%) have not ben impacted by the new CIRO decision. The first year’s fees are due when you deposit your money. It’s not CALLED a commission, but this first year fee has the exact same effect. Yet CIRO has not banned these fees at this time. This seems inconsistent.

With annual fees averaging about 1%, a representative for these companies must have a “book” of business between $12 and $15 million to make a livable income, since the company takes some of the fees for their own costs and profits, and there are expenses to the representative for the office space and facilities. This means the representative needs a minimum of 25 to 30 clients to make a reasonable living. Building this size of business takes time – during which the representative is investing in building a business. A knowledgeable advisor with good communication skills might close 2 to 3 clients a month, which means there would be a livable income within 15 months. However, the turnover of new representatives in those companies is very high – possibly as many as 90% of new advisors don’t last 2 years.

The impact is even larger on those willing to work to help average Canadians build better financial futures. These families typically start with funds under $50k. Such an account generates annual retainers of $500 to the company, with 40 to 65% going to the advisor. This means a monthly income of $28 to the advisor. A living income would therefore require 250 clients. These small clients require as much effort as large clients to build trust and get started. Closing the same 3 accounts per month gives over 7 years to build a livable income!

Such a scenario is certain death to the independent advisor model for small clients! Not being large enough to approach the fee-based companies to open an account, the small investor will have only one viable alternative – the bank branches. As documented elsewhere, this means the client will work with someone who cannot provide quality investments that will even match the market, much less outperform it. They will work with someone who builds no relationship to the client, as they will be in another role within 2 years. Having no one who will help educate them, the client will significantly underperform financially.

How do I come to believe this to be true? Because it is exactly what happened to me in 2006, creating my interest in addressing the problems in the industry. Before writing The 3-Plan Retirement book, I set up a customer each from 3 of the big 5 banks to repeat a scenario similar to the one I went through. For all 3, the same thing occurred. They were told words to the effect of “You can’t have those investments, they are not open to you.” Instead they were offered what I consider to be junk “portfolio funds”!

CIRO, this one-time cost focus will not “help the investment industry deliver the right financial outcomes for investors”. Neither will reducing the number of options available for smaller investors. This decision needs to be reconsidered before it causes extreme damage to one channel in the industry!

For other examples of changes we recommend to CIRO to help Canadian investors check out our Industry Issues blog posts.