July 2023

In this issue, we delve into a new investment trend—HISA ETFs—and explain how they are different from the high interest savings accounts available at your local bank. We also discuss the risks of relying on social media finfluencers for investment decisions. And we explore the potential risks to investors posed by a fee structure often associated with segregated funds called advisor chargeback sales commissions. 



The Latest Trend – HISA ETFs

We are hearing a lot about “HISA ETFs” these days. But what exactly are they?

HISA stands for high-interest savings accounts (HISA). Many banks have begun offering them to encourage Canadians to put more money into savings accounts. ETF stands for exchange-traded fund, which is basically a mutual fund that is sold over a stock exchange like the stocks of listed companies. Combining the two provides investors with a new investment product they can buy and sell.

How do they work? Basically, a fund manager creates an ETF, which it sells to investors. It then takes the money from investors and deposits it into several high-interest savings accounts at major banks. Since the fund manager can invest a lot more money than an average investor could on their own, they can usually negotiate much better interest rates with the banks. Investors that buy the ETF benefit from the higher interest rate, which the fund returns to them in the form of dividend payments.

According to National Bank Financial, investors purchased $854 million worth of HISA ETFs in just one month (March 2023), and more than $2.76 billion since January 2023. The rise in popularity of HISA ETFs is partly due to high inflation, which is pushing investors to maximize how much they can earn on the money that would otherwise be sitting in a savings account. And most of the marketing hype around HISA ETFs will tell you they have all the advantages and flexibility of savings accounts, while offering you much higher daily interest rates.

Before you decide to buy a HISA ETF, however, it’s important to look behind the hype and understand how they differ from savings accounts, including HISAs, available at your local bank.

One major difference is that a HISA ETF comes with trading costs. Generally, every time you buy or sell one, you pay a trading fee. So, the more you trade, the more these fees will work against you. And because the trading commissions are usually a fixed amount, buying a HISA ETF may not be very cost-effective if you only invest a small amount.

Additionally, it’s important to know that you also pay fees embedded in the ETF. These embedded fees pay the fund manager’s expenses to operate the ETF and to earn a profit. These fees are taken directly out of the fund and the longer you hold the HISA ETF, the more you will end up paying in management fees. Again, this will reduce how much you stand to gain.

Lastly, when your money is deposited in a savings account at your bank, including a HISA, the first $100,000 is insured against your bank failing. This insurance does not apply, however, to a HISA ETF.

Regulators are paying attention to the increasing number of HISA ETFs. The Office of the Superintendent of Financial Institutions (OSFI) is looking at how banks handle HISA ETFs to ensure they properly capture the risks of these products. OSFI’s review may lead to changes in how banks classify deposits from HISA ETFs, which could result in investors receiving lower interest rates on these funds.

Like all other investment products, HISA ETFs come with risks and benefits. It’s essential that you compare them with other ways of earning a higher interest rate. The additional fees associated with a HISA ETF may not be worth the trouble.

Ultimately, your investment decisions should align with your risk tolerance and financial goals. Before investing, try to learn about the product you are buying. You may also want to seek independent advice from a qualified individual. But be cautious because some people who call themselves financial advisors are just salespeople.

For more information, check out FAIR Canada’s helpful resources on Choosing an Advisor and Working With an Advisor.

Beware of Advice From Finfluencers 

In recent years, finfluencers have become popular on social media platforms, promoting investing and financial products to their audiences. And an increasing number of investors are turning to social media for financial advice.

A 2022 National Study by the British Columbia Securities Commission (BCSC) revealed that about 33% of Canadians are engaging with social media on a weekly basis for investment advice. According to a 2023 Task Force Report by the International Organisation of Securities Commissions, there were concerns about the increasing influence of social media on retail investment decisions.

While social media platforms offer a convenient and easy way to access investment-related information, it’s important you find a trustworthy and reliable source. Finfluencers often oversimplify complex financial products, or have limited expertise or knowledge about investing. Others may be paid to promote certain companies or financial products, which skews their advice. And most, assuming they even care, have no way of knowing whether their advice is right for your situation. Blindly following their recommendations can often lead to poor investment decisions and outcomes.

Some finfluencers may even use their influence to enrich themselves at your expense. For example, in December 2022 the Securities and Exchange Commission (SEC) in the U.S. charged eight influencers for engaging in a “pump and dump” scheme on Twitter and Discord. A pump and dump is a type of fraud where someone intentionally shares false information about a specific stock they own to try to get the price to increase. When the price goes up, they sell their stocks and walk away with a tidy profit, often leaving other investors with substantial losses. In the SEC case, the finfluencers allegedly made $100 million from their illegal pump and dump scheme on social media.

The newly amalgamated Canadian Investment Regulatory Organization is updating its guidance on using advertising and social media. The new guidance is expected to focus on social media influencers.

It’s not just fraudsters that pose a threat. Even seemingly honest finfluencers raise concerns. A recent article, entitled Investors Flock to Loudest, Least Skilled Voices on Social Media, highlighted new research by the Swiss Finance Institute. The Institute’s research found that unskilled finfluencers have more followers, more activity, and more influence on retail trading than skilled finfluencers. Additionally, it showed that most finfluencers are inexperienced and often provide overly positive advice about a stock’s potential.

Regulators in Canada and internationally are beginning to respond to the risks finfluencers pose to investors. In 2021, the BCSC proposed rules that would require anyone promoting companies to the public or on social media to disclose, among other things, whether they are being paid or whether they own any stock of the companies they are promoting. FAIR Canada supported the BCSC’s proposal, and we continue to encourage other provinces to introduce similar rules.

The newly amalgamated Canadian Investment Regulatory Organization is updating its guidance on using advertising and social media. The new guidance is expected to focus on social media influencers and the use of gaming techniques to influence investors to make inappropriate trades.

While these regulatory efforts are positive steps forward, it is equally important for you to take measures to protect yourself. Here are some questions to ask yourself when evaluating advice from finfluencers:

• Are they licensed to give financial advice? You can check whether they are licensed by doing a simple search on the Canadian Securities Administrators’ (CSA) National Registration database.

• Do they make big promises? Some influencers may make extravagant claims about investment strategies or specific stocks. It’s important to approach recommendations with skepticism and seek advice from a qualified expert before making any decisions.

• Is the advice suited to your personal situation? When a finfluencer suggests specific investments or amounts to invest, they don’t know your risk tolerance, your ability to withstand a loss, your investment goals, or your investing capabilities. Before you invest, always consider your risk tolerance and how much you can afford to lose.

Additional resources from BCSC:

• Financial Influencers: How to Navigate Online Financial Advice

• Investment Fraud via Social Media



Should Advisor Chargebacks Be Banned Next?

When it comes to sales charges, investors need to pay attention to products, such as mutual funds, exchange-traded funds, and segregated funds (sometimes referred to as individual variable insurance contracts or IVICs).

Each of them can be sold under a different sales charge option. For example, investors may have to pay a sales fee when they buy it (front-end load), or pay the sales fee when they sell it (back-end load or deferred sales charge (DSC)). The DSC option is usually tied to a declining fee schedule, typically between five to seven years. This means the amount of the sales fees decreases by a certain amount each year that the investor remains invested in the product. If you hold a product with a DSC structure for more than the fee schedule period, you will not have to pay any sales fee.

DSCs also led to suboptimal outcomes for certain investors, who stayed invested in an underperforming fund to avoid paying the sales fee.

These different fee structures affect investors in various ways and may, in some cases, lead to poor outcomes for investors. This was the case for DSCs and regulators ended up banning them.

The ban was introduced because DSCs created conflicts of interests and influenced advisors to sell products that were not in the best interest of their clients. DSCs also led to suboptimal outcomes for certain investors who stayed invested in an underperforming fund to avoid paying the sales fee. Like many others, FAIR Canada supported the DSC ban because of the risk to investors and the fact these risks could not be effectively managed through enhanced disclosure or other regulatory measures.

There is another sales charge option, however, that seems to be gaining popularity and is raising similar concerns. Called advisor chargebacks (ACBs), these sales charges are like DSCs in the sense that a “fee” is paid when the product is sold. They also include a chargeback schedule that specifies what amount must be paid over the fixed period. Unlike DSCs, however, when the client wants to sell, it is the advisor who is out of pocket—they have to repay a portion of the commission they received from the fund manager when they first sold the segregated fund to the client. Hence the name advisor chargeback. 

Some in the industry are trying to convince governments and regulators that the fact the advisor pays the fee is a critical difference from DSCs. They argue this difference motivates advisors to only sell products with ACBs to clients they are confident will not want or need to sell the product during the chargeback period. In short, regulators need not worry that ACBs create any consumer protection risks. 

This all sounds good until the client changes their mind, or their circumstances change and they need to sell during the chargeback period. We all know the future is hard to predict. We also know that a client’s financial situation can change relatively quickly for many reasons. We expect this will happen more often than most advisors anticipate. And when it does, the interests of the client (who wants to sell) and the advisor (who does not want to repay the commission) will be in a direct conflict.

Given this clear conflict of interest, we worry that some advisors will try to discourage their client from selling, even if selling would be the right thing for them to do. In fact, we predict it will happen and will expose investors to potential risks and harm.

Regulators are paying close attention to this issue. The Canadian Council of Insurance Regulators (CCIR) and the Canadian Insurance Services Regulatory Organization (CISRO) announced that ACBs need robust controls to protect consumers from the risks. More recently, they stated ACBs should not be considered “unequivocally better” than DSCs.

CCIR and CISRO also intend to conduct regular reviews to ensure customers are treated fairly when this option is offered to them. The CSA also announced they will be reviewing ACBs in the mutual fund industry.

This is a step in the right direction, but we think regulators should move quickly and ban ACBs outright, given the direct and inherent conflict of interest they create between advisors and their clients.

What can you do?

When your advisor recommends that you invest in an investment fund product, always ask them about the fund’s fee structure. Also, it’s important to understand how your advisor gets compensated. Find out whether the fund pays them a fee for recommending its product to you. And don’t underestimate how different fee options can influence the advice you receive. Research shows that fees do impact the advice you receive, sometimes to your detriment.

To learn more about fees, read our investor friendly resource: Understanding Fees and Statements

Prosper Canada Resources – Enhance Your Financial Literacy 

FAIR Canada works collaboratively with other organizations to help promote investor rights and protections, including how to become a more informed investor. We’re pleased to share that Prosper Canada designed a user-friendly online course to help Canadians enhance their financial well-being. The course is called “Making the Most of Your Money” and contains three modules with essential information about budgeting, investing, debt management, and goal setting.

To broaden your financial literacy and improve your decisions around money management, explore the free course here: https://yourtrove.org/courses/

Exploring RegTech Solutions for Ontario’s Capital Markets

The Ontario Securities Commission (OSC) released the results of its newest program called OSC TestLab. TestLab is a forum designed to explore new and better ways of doing things by enabling solutions and using technology. The initial focus was on technological solutions (RegTech) that could help address several regulatory challenges. Its first series of tests “explored RegTech’s potential to help registrants, investors, and regulators alike by improving the speed and ease of compliance functions, facilitating access to information, and reducing human error and operation costs.”

To read more about the results, visit: www.oscinnovation.ca/TestLab2022-report