While the true results of regulatory reforms in the UK and Australia have yet to be determined, a panel of experts from those countries say the changes already provide some key lessons for Canadian mutual fund and insurance associations: work with your regulators to come up with the best solution for investors or regulators will make the decisions for you.“We are exactly in the place where you don’t want to be,” said Garry Heath, a former director general of the IFA Association, an advisor group, in the United Kingdom, referring to reforms that included banning embedded commissions beginning Jan. 1, 2013.
The reforms, known as Retail Distribution Review (RDR), have dramatically reduced the number of advisors in the UK and the number of people with the financial means to get access to a financial advisor, Heath told the recent Advocis 2014 Symposium in Toronto.
Wealthy clients will always be looked after, Heath said. But with independent advisors and banks, which had provided lower-cost products, all but dropping out, millions of average people are being disenfranchised.
Since RDR came into effect, the number of people working with a financial advisor has dropped to 13 million from 23 million, he estimated.
In an interview, Heath said Canadian advisors should tell regulators that what’s really needed is to ensure the maximum number of Canadians is invested.
“Try to lead public perception, not react to it,” he told the symposium. “You need a good compensation mechanism for people who lose money and are poorly advised but try and entrench it in civil law. Get out there, explain the real world to them because I promise you, there will be regulators willing to explain something else.”
Heath said Canadian regulators seem to be “standing away from the cliff at the moment. My regulator shouts from the cliff edge: ‘Come on in, the water’s lovely.’”
He acknowledged that the recent CRM2 rules, which will ensure disclosure of all mutual fund charges and other advisor compensation, including trailer fees and referral fees, by July 2016, is a good first step.
But Rod Bryson, assistant director, corporate strategy, financial services with PwC in the UK, said disclosure didn’t work in the UK because the industry fought the changes.
“It was a process and nobody really believed in the process,” said Bryson. “[When the question was asked], ‘Is the industry capable of listening, of changing, of evolving?’ In effect, the result was no.”
As well, he said there had been a strong culture of “product push” which was driving remuneration for advisors, but not necessarily good investments for consumers.
“Because of that I think it’s incredibly hard to say whether RDR in the UK has worked or not. And I think it’s going to be another three to five years before anybody can articulate a proper answer to that.”
Four years ago, PwC conducted a study and determined there was a gap between what advisors thought they were worth and what clients were willing to pay. But many clients valued service and were willing to pay for an experienced advisor with a good value-add proposition.
While the number of advisors has dropped off in the UK, Bryson says the time has never been better for advisors willing to work hard and focus on customer needs.
“If you are an advisor who has an entrepreneurial spirit and who wants to do the right thing for the customer…this is a great time. There aren’t many times in a market when it is truly evolving, but this is one of them.”
He suggested that securing the mass market will require innovation, possibly from technology and “robo-advice” – a platform that introduces automated investment plans picked by computer algorithms. Some of these platforms that have already been introduced in the U.S. charge fees of about 0.25 per cent of the money invested. (Charles Schwab Corp. recently announced it will introduce free robo-advisor platforms, making money through fees from managing and servicing the underlying ETFs and investing client cash in portfolios.)
Banks in Australia are also taking a hard look at using robo-advice, said Anthony James, a PwC partner in Australia.
In Australia, reforms called the Future of Financial Advice (FOFA) became mandatory on July 1, 2013. Their primary goal was to improve the quality of, and access to, financial advice for Australian consumers. One of the first things it did was remove embedded commissions, meaning advice is now totally fee-for-service.
Joining the conference via Skype, James said banks can no longer make money off advice from the average person and are looking at new technology, like robo-advice, while pushing their products to these same consumers.
He echoed Heath’s concern that most Australians can no longer afford to pay a cheque to advisors for the advice and might drop out of using advisors altogether.
Some advisors have left the industry in Australia, but the majority stuck around and are successfully transforming their business models into fee for service and are doing well with their high net worth clients.
In an earlier panel, Joanne de Laurentiis, president & CEO of the Investment Funds Institute of Canada (IFIC), said a key contributor of a well-developed financial services industry in Canada is a robust regulatory framework.
De Laurentiis said the industry and regulators share the goal of serving the best interests of investors and “while it seems that we are sometimes at loggerheads with our regulators, in fact, we all accept the need to evolve the regulatory framework.”
The Canadian Securities Administrators (CSA) is not rushing into banning embedded commissions in the mutual fund industry, as was the case in the UK and Australia, saying they have no compelling reason to rush forward, she said.
Greg Pollock, president and CEO of Advocis, said he is confident that the way segregated funds are currently regulated works very effectively. Disclosure of fees and conflicts of interest rules coming in through CRM2 are only for the mutual fund industry – not insurance. But Pollock acknowledged that if fees attached to products are banned on the investment side, there would be tremendous pressure to have the same happen on the insurance side.
“So I don’t think, as far as the insurance industry side [is concerned], that we can just sit back and say we’re fine, there’s no issue – because there will be pressure if that actually occurs.”
Frank Swedlove, president of the Canadian Life and Health Insurance Association (CLHIA), said the insurance industry and regulators have traditionally worked well together on some issues, noting the recent CLHIA oversight agreement with MGAs. “But increasingly, I think that kind of model is going to be under pressure.”
He noted a survey by the Financial Services Commission of Ontario (FSCO) last year, in which about half of the 1,400 life-licensed advisors surveyed did not give the kinds of disclosure required by Ontario regulators regarding conflicts of interest. “This is really quite worrying because in some sense there is an expectation of following through with the commitments that we make.” He said FSCO will repeat the survey in another year to see if compliance rates have improved, adding he thinks there is an onus on the entire industry to find a way so that more advisors will follow the rules.