The Canadian Investment Regulatory Organization (CIRO) may allow advisors to form professional corporations. What does that mean for you?
Disclaimer: This article discusses changes to buying and selling a book of business. It is intended for the purposes of providing information only and is to be used only for the purposes of guidance. This article is not intended to be relied upon as the giving of legal advice and does not purport to be exhaustive.
When it comes to financial advisors buying and selling their book of business, you need to consider several regulatory challenges. One area of interest to many in the financial services industry is whether advisors will soon be allowed to operate through professional corporations in the same way that doctors, lawyers, and realtors can.
The rules are still in flux, but CIRO proposes changes that could be on the horizon. This article will explore these proposed changes and what they mean for you and other professionals in the financial services industry.
Current State of Financial Advisors Operating Through Corporations
Currently, financial advisors are not permitted to own their book of business through a corporation, as other professionals can. Selling your practice as a share sale rather than an asset sale is limited, creating challenges for those looking to exit or transfer ownership of their business. We spoke about these challenges at length in this article.
While CIRO (the Canadian Investment Regulatory Organization) has been contemplating allowing advisors to use professional corporations, those changes have not yet been finalized.
Understanding the Canadian Investment Regulatory Organization’s (CIRO) Role
Financial advisors in Canada are governed by the Canadian Investment Regulatory Organization, which was formed from the merger of the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA). Before the merger, IIROC regulated investments related to the stock market, while the MFDA oversaw mutual funds.
This regulatory division resulted in differing rules for how financial advisors and investment dealers could operate.
For instance, mutual fund advisors have historically been allowed to run their business through a registered corporation, giving them more flexibility in selling their book of business. In contrast, IIROC-regulated investments could not be operated in the same manner, restricting their ability to transfer revenue rights through a registered corporation.
What Changes Might CIRO Bring?
CIRO has proposed changes that could allow all financial advisors, including those handling IIROC-regulated investments, to operate through professional corporations. This would be similar to how lawyers, doctors and other professionals are able to form professional corporations.
If it approves this change, advisors could transfer the revenue rights of their book of business through a corporation. However, there is still no clear timeline for when CIRO might propose or approve these amendments.
If and when the rules are updated, it could significantly simplify the process for financial advisors looking to sell their business. They would then have the option to sell their book of business as a share sale, allowing for greater flexibility and potentially reducing the time and complexity involved in such transactions.
Implications for Financial Advisors
For financial advisors, the potential for CIRO to allow the use of professional corporations is significant. It could bring a number of benefits:
- Simplified Sales Process: Advisors could choose to sell their business as either a share sale or an asset sale, depending on their specific needs and circumstances, impacting the type of compensation received.
- Flexibility in Ownership Structure: With the ability to own their book of business through a personal corporation, advisors could have more options for tax planning, succession planning, and overall business management, including structuring their compensation in more advantageous ways.
- Reduced Need for Workarounds: Currently, some advisors must put complicated workarounds in place, but a change in CIRO’s regulations could eliminate the need for these strategies.
- Alignment with Other Professions: This change would align financial advisors with other professionals like doctors, lawyers, and realtors, who already have the ability to operate through professional corporations.
What Can I Do Until CIRO Makes Changes?
While the industry waits for CIRO to allow financial advisors to operate through professional corporations, you can act now to prepare to sell your book of business. Advisors looking to transition their practice in the future should consider laying the groundwork well in advance.
Understanding your options and developing a strategy that aligns with both your financial goals and regulatory constraints can make give you the freedom you need when you are ready to sell. The key takeaway is not to hinge your business decisions solely on what CIRO or any other securities regulatory body might do. By planning and working with experienced professionals, you can be prepared for any scenario and make the most of your opportunities.
At Beeksma Law, we help financial advisors understand and navigate both purchases and sales. If you’re thinking about selling your book of business or want to discuss your options for structuring your advisory practice, reach out to us today.
Our team takes the time to get to know you and your specific situation so that we can provide guidance tailored to you! Get in touch today to learn how you can plan for both the current environment and any potential future changes.