It can be very difficult to understand how the retail investment sector in Canada works, especially if you have never been employed within the sector.
An advisor’s background and expertise can vary greatly, and Ontario is only implementing a licensing requirement for some advisors by the year 2026. There are lots of acronym’s for different types of advisors. So what’s the difference between an MGA, MFDA, and IIROC advisor?
MGA advisors are generally only insurance licensed but can provide their clients with access to a limited shelf of investments through segregated funds.
MFDA advisors are usually limited to offering only mutual funds to clients, although they could also offer segregated funds if insurance licensed.
IIROC advisors have the option to offer virtually any investment to their clients and may also be discretionary or insurance licensed.
We will cover MGA, MFDA, and IIROC advisors below and discuss how they each differ.
MGA vs MFDA vs IIROC Advisors: What’s the Difference?
What is an MGA?
A managing general agency, or MGA, can be thought of as an insurance dealer for an insurance agent.
An insurance agent can sign a contract to work under a specific MGA and the MGA will provide the agent with some resources such as a back-office, tools, and resources.
Some examples of MGAs in Canada include:
An insurance agent or advisor can be contracted under multiple MGAs and place business with whom he or she pleases. The MGA will usually earn a portion of the agent or advisor’s commissions or fees in exchange for the resources it provides.
MFDA and IIROC
The MFDA and IIROC are two self-regulatory organizations (SROs) in Canada, within the investment industry. MFDA stands for Mutual Fund Dealers Association and IIROC refers to the Investment Industry Regulatory Organization of Canada.
Different investment dealers can operate beneath the MFDA and IIROC SROs. Some investment dealers also operate under both.
Examples of MFDA dealer firms include:
- Sun Life Financial Investment Services
- Worldsource Financial Management Inc.
- Credential Asset Management Inc.
Examples of IIROC dealer firms include:
Financial advisors that are working under an MFDA dealer firm can also contract with an MGA for their insurance business. A firm could have diverse business operations by operating an MGA and an MFDA dealer at the same time.
These are usually similarly branded, such as HUB Financial Inc. and HUB Capital Inc.
MFDA dealer firms typically restrict their advisors to only offering mutual funds to clients. These financial advisors are typically not allowed to trade stocks, bonds, options, and hedge funds for their clients.
Advisors working under an IIROC dealer have the most flexibility. A lot of IIROC advisors will also be insurance licensed as they typically offer clients a full-service experience.
IIROC advisors are able to buy and sell virtually any investments that are available to retail investors.
MGA Advisors: A Focus on Insurance
As financial advisors, those that are only insurance licensed and operate through an MGA are the most limited in terms of what they can offer clients.
MGA-only advisors can only offer clients segregated funds on the investment side. This immensely reduces their ability to control fees, taxable events, and the actual underlying investment for their clients.
What is a Segregated Fund?
A segregated fund is similar to a mutual fund but comes with several additional features at a higher MER.
Segregated funds are considered an insured money product and require investors to name a beneficiary when purchased. This provides several benefits upon the death of the investor:
- Probate is generally bypassed in non-registered accounts
- Funds are paid to the beneficiary quickly and confidentially
- Creditor protection in certain situations
Segregated funds also come with a maturity benefit and a death benefit.
At a specified maturity, a specific percentage of your assets (usually 75% or 100%) are guaranteed.
With regards to the death benefit, a specific portion of assets (again usually 75% or 100%) are guaranteed upon the investor’s death.
Given all of these additional features of segregated funds, they come with a much higher MER than mutual funds. Keep in mind that mutual funds, in turn, come with a much higher MER than ETFs.
Given the nature of MGA advisors’ licensing, it is difficult for them to compete on the investment side with a full-service IIROC advisor or even an MFDA advisor.
MFDA Advisors: A Focus on Mutual Funds
The next type of advisor is the MFDA advisor. Since the mutual fund shelf in Canada is more diverse than the segregated fund shelf, investment options for an MFDA advisor’s clients are broader.
At the end of 2021, Canadian mutual fund assets were just north of $2 trillion.
A lot of MFDA advisors are also insurance licensed and contracted under one or more MGAs. This gives them the ability to offer the same segregated funds as an MGA-only advisor.
The wider product offering for MFDA advisors (especially those that are also insurance licensed) helps in at least two ways.
It allows them to potentially lower their clients’ total investment costs by avoiding segregated funds altogether. Depending on their fund selection, MFDA advisors may also be able to construct more robust portfolios for clients.
Mutual Funds vs ETFs
It is extremely important to understand the distinction between mutual funds and ETFs. While this isn’t the focus of this article, here are some key points below:
- Mutual funds are typically actively managed while ETFs are passively managed
- ETFs may be more tax-efficient than mutual funds
- ETFs trade on an exchange like a regular stock while mutual funds do not
- Mutual funds typically charge a higher MER for active management
MFDA advisors are not usually able to offer their clients individual stocks, bonds, options, hedge funds, or even ETFs.
IIROC Advisors: The Highest Flexibility
The last category of advisors in Canada is those that are licensed under IIROC.
IIROC advisors are frequently found underneath full-service brokerages with the major banks in Canada. With that said, independent IIROC dealers are also fairly commonplace.
A good number of IIROC-licensed advisors are also insurance licensed, allowing them to offer insurance and segregated funds.
IIROC licensing usually allows an advisor to deal in virtually all investments, including stocks, bonds, hedge funds, ETFs, mutual funds, and offering memorandum products.
Flexibility vs Competence
If an IIROC advisor also has his or her insurance license and is able to deal in all products, it does not necessarily mean they are the best possible advisor to choose.
There are quite a few fantastic mutual funds and segregated funds available in Canada which have provided investors with great returns net of fees.
While IIROC licensing can be considered to be the most relatively stringent out of the three advisor types, it is not an extremely difficult process to complete.
Make sure to consider an advisor’s credentials and additional designations, which can point to additional skills, knowledge, and training.
An experienced IIROC advisor will have the most possible control over your investment portfolio.
Stock and Bond Portfolios
An IIROC-licensed advisor has the option to construct fully custom portfolios using bonds, stocks, and other no-fee investments. Since bonds and stocks do not come with any built-in MERs, you would only be paying the advisor his or her advisory fee.
The ability to pick stocks and bonds for part of a portfolio allows you to save on fees when working with an advisor.
Discretionary Portfolio Managers
An IIROC advisor can also be a discretionary portfolio manager if he or she has the appropriate credentials and work experience.
A discretionary portfolio manager will be able to place trades on your behalf without having to obtain verbal confirmation for each buy and sell.
Conclusion
The type of advisor that you are working with will greatly impact the approach that will be taken with your investment portfolio.
While we are not saying that IIROC advisors are the best or that MGA advisors are the worst, there is a huge difference in terms of flexibility around what investments each type of advisor is able to offer.
Flexibility is no substitute for quality and there are a lot of fantastic MGA and MFDA advisors working with clients in Canada.
Working with an advisor is not the only choice you have regarding your investments – you can use a robo-advisor or manage your own portfolio.
