The ways financial advice-givers in Canada quantify what their time and service is worth to Canadians, are likely going to be examined more closely by those who remain in the business going forward.
Several trends afoot, meanwhile – some being advanced by new regulation, some being exacerbated by regulatory trends in jurisdictions outside of Canada entirely, and some being perpetuated by member’s own decisions – all have Advocis surveying the Canadian public, to find out if people in fact believe an advisor’s advice is valuable, or not.
“There is this view that advice is conflicted, that people are unhappy with their advisors, and the way they pay for advice. That is the impression we have as we read some of the information coming from securities regulators,” says the association’s president and CEO, Greg Pollock. “We wanted to explore that.”
At the annual Canadian Association of Independent Life Brokerage Agencies (CAILBA), Pollock shared initial findings from an Advocis-commission survey, due out in September, which suggests Canadians in fact believe financial advice is valuable to them.
The survey of existing clients, recruited by their own advisors at Advocis’ behest – show 77 per cent of those responding say financial advice is very valuable; 19 per cent say financial advice is somewhat valuable. Approximately 75 per cent completely agreed with the statement “my advisor is worth the money I pay,” and 76 per cent said “I am better off financially for having worked with my advisor.”
The survey’s content is timely, as regulators examine compensation changes, and as client relationship model (CRM2) disclosure requirements continue to work their way into practice, implementation and public consciousness, at the same time.
“People will be anxious to measure that immediately,” Pollock says of the impact CRM2 might have on awareness levels. “But let’s let the dust settle – I’m sure there is going to be some sticker shock as people look at those statements.”
Rather than rush to modify things even further, he says he would prefer the industry allow a period of integration that will allow people to get used to the new level of fee transparency. “Are people satisfied now with this new system of disclosure and transparency?” If they are, he adds, it might then make sense to reconsider the assumption that embedded commissions create bias or affect advice quality.
Most notably, Pollock says lower and average-income Canadians will likely not be able to afford advice at all, if compensation for such is not bundled into the products being sold. He also says advisors in the industry might want to reconsider their intent focus on higher-net-worth clients, and begin to think about the ways they might more effectively and profitably serve the mass market.
In particular, he points out the traditional, fully-delegated model where advisors have the information, and generally make decisions on their investor’s behalf, is giving way, almost completely, to “assisted” investing, with technology enabling the client to make decisions on their own behalf, as well.
“I’m not sure that many advisors out there are as proficient as they need to be with the new technologies, and fully leveraging those new technologies into their business practices,” he says. “I see a lot of blank stares. I see some nodding, but there are a lot of blank stares.”
Are people satisfied now with this new system of disclosure and transparency?
– Greg Pollock
Authors of a PwC survey which Pollock refers to, write: “in reality, while many financial service firms offer brokerage services and other tools on their websites, most have not integrated these offerings into a full, digital advisor-based user experience.”
Entitled Sound Advice, insights into Canada’s financial advice industry, the report also goes on to say “advisors could better meet changing market needs (of technology-enabled clients, everywhere), by shifting from a traditional delegated advice service model....to guided, self-service models.”
Why advisors should bother, begins to become clear on examination of population and wealth distribution numbers: Although a client base of high-net-worth and affluent clients is the gold ring for many, both of these segments only make up four per cent of Canadian households.
Still, reasons for this current focus are fairly clear. According to the Investor Economics research Pollock cites, the four per cent of Canada’s wealthiest households are worth almost $1.9 trillion. Still, he points out that 80 per cent of Canadian households – worth only $320-billion, and $408-billion if you include mass affluent clients, as well – stand to inherit or otherwise increase their wealth by an additional $263-billion in the next 10 years.
In defence of advisors
These clients, he says, risk losing out on the benefit of having financial advice, particularly if unbundled commissions mean clients must write their own cheque for service.
Moreover, Pollock points to the economic impact advisors have on the Canadian economy. Again citing PwC’s research, he says Canada’s 80,000 advisors (independent – the number does not include bank advisors or head office support staff), distributed across all geographies instead of being concentrated in one area as is often the case in other industries, directly contribute $19-billion to Canada’s GDP, and 180,000 jobs that would otherwise not exist. Their total economic impact is approximately $25-billion in GDP and 240,000 jobs.
This positive influence could be threatened, he says, along with the advice lower-income households receive, if regulators follow the same path taken in Australia and the United Kingdom (UK), where commissions were banned in response to issues of churning and other misdeeds occurring there.
Banning embedded commissions and implementing other, new regulatory changes in the UK, resulted in a loss of approximately 25 per cent of the industry’s advisory workforce. Those remaining shifted their focus to high-net-worth clientele, away from service to the mass market. In Australia the cost to serve clients rose by 30 per cent in response to similar efforts.
“I understand the regulators’ concerns, and the ‘we need to do something’ (urge),” he says. “I’m saying we need to be careful. Watch for those unintended consequences. We could actually hurt our consumers more than we help them, if we’re not careful with these kinds of decisions.”