FORUM MAGAZINE
INDUSTRY EVENT
Convergence—The Next Wave
On November 23, 2011, industry leaders, regulators and financial advisors came together to share their perspectives on new products, regulatory responses and the role of the advisor at the third annual Advocis regulatory affairs symposium. At the heart of this year’s discussions was the alignment of advisor and consumer interests in an era of increased product complexity and global economic volatility
By Kristin Doucet
According to the Oxford English Dictionary, “convergence” is “[a] coming together from diverse points toward a common point.” This is an apt description of what is currently happening in the financial services industry. The proliferation and increasing complexity of new investment and insurance products coming to market, combined with a more demanding post-crisis consumer, is putting pressure on government and regulators to create solutions that focus on consumer protection.
As regulators at home monitor the developments of their global counterparts, financial advisors in Canada are facing the possibility of similar regulatory changes being adopted in Canada, even though they may not be appropriate for the Canadian consumer.
“In response to those who say we should follow what other jurisdictions are doing, my response is that we should not overreact,” said Greg Pollock, CFP, president and CEO of Advocis, in his opening address. “The changes being considered in the United Kingdom, the United States and Australia on remuneration and duty of care are proposed solutions for problems in those jurisdictions driven by the perception of those jurisdictions that the financial industry has not been serving consumers as it should. This is not the case here in Canada.”
Essential Advice
The need for financial advice has never been stronger than it is today. That was the message conveyed by Charles Sims, FCA, president and CEO of Mackenzie Investments, in the first plenary session entitled “The Value of Advice.”
Most Canadians don’t have the time to look after their finances, and the average investor is subject to various biases and counterproductive behaviors when they invest. Simply put, advised investors are more likely to save early and more often, are more confident about their investment choices, and are more likely to stick to their financial plan. These findings and others are supported by research conducted last year by Pollara and Ipsos-Reid on how advice is meeting investor needs.
“Canadians overwhelmingly choose financial advice over non-advice,” Sims said. In addition to being more disciplined in their savings, the research conducted by these research firms also indicates that those investors who have advisors also have more investable assets, higher participation rates in tax-advantaged plans, and higher net worth across all age and income levels.
“Difficult markets often result in people losing sight of their long-term financial plan,” he added. “Save often and save consistently is the most important message you can have for clients.”
While the need for advice will only become greater in Canada as its 10 million baby boomers prepare to retire, the cost of that advice has been at the centre of debate about compensation disclosure and the embedded fee model found in MERs. Sims pointed to Pollara’s 2011 study, “Canadian Investors’ Perception of Mutual Funds and the Mutual Fund industry,” which shows that nearly 60 per cent of investors prefer paying through fees that are part of mutual funds to paying a fee for service.
Consumer Protection
Today’s post-crisis consumer has high expectations of his advisor, and the advisor’s ability to access a wide array of products is one of them. While choice can be a good thing, too much choice does not always serve the investor well.
Twenty years ago, for instance, exchange-traded funds (ETFs) started out as a straightforward, low-cost investment that allowed the average investor instant diversification with one purchase. Today, there are over 200 types of ETFs in Canada — from actively managed to leveraged and inverse. What started out as a simple offering has become a complex and at times confusing array of choices for both the consumer and the advisor.
Increased product convergence has become the industry norm. The question is whether this product convergence will lead to an increased regulatory response. Given the complexity and blurring of products across the financial services pillars, regulators are turning their minds to ensuring that the modern consumer is well informed.
This year’s regulatory panel included Gerry Matier, executive director of the Insurance Council of British Columbia (ICBC), Mary Condon, vice-chair of the Ontario Securities Commission (OSC), and Phil Howell, CEO and superintendent of financial services for the Financial Services Commission of Ontario (FSCO). The panel discussed the areas of concern for their jurisdictions and provided an overview of new regulation they have introduced or are considering introducing.
In British Columbia, for instance, the ICBC has put out proposed guidelines and changes for life insurance agents that include: mandatory two-year supervision of new agents effective this month; more accountability for the retail life agency when it comes to compliance and supervision of its agents; more responsibility for MGAs similar to that of retail life agencies; and the identification of clear obligations of life agents who are selling products from the exempt market.
The OCS’s Mary Condon discussed four areas the securities regulator is currently focusing on — the international context of securities regulation, investment products, financial advice and investor education.
“There have been significant changes in the breadth and complexity of products … and much more blurred lines between products across the banking, insurance and securities sectors,” noted Condon, who used ETFs that invest in derivatives as one example of a hybrid product that is more complex and riskier than, say, an index ETF.
While product innovation makes for a competitive marketplace, it can also create more confusion for the consumer. The challenge facing the OSC, said Condon, is ensuring disclosure to the consumer is appropriate, outlining the need to focus on “comprehensible” rather than “comprehensive” disclosure to help investors make better choices. She cited the “fund facts” regulation, which will take effect in 2012, as one regulatory response to this problem within the mutual fund industry.
“The goal here is to try to … encourage markets to continue to innovate and compete, but also to take steps to address the risks involved and do our part as securities regulators to promote financial stability.”
Condon remarked that product suitability and fiduciary duty — putting clients’ interests first — are also on the OSC’s radar. The fiduciary duty issue has attracted much debate at home and abroad. While Australia is introducing a statutory fiduciary standard, the OSC, which advocates “evidence-based” policymaking, is exploring regulatory alternatives such as clearer disclosure to clients and modifying advisor-dealer compensation structures.
FSCO’s Phil Howell concluded the regulatory panel with his insights into the factors driving regulatory change. Both in Canada and internationally, the regulatory emphasis of late has been on safeguarding consumers’ interests and establishing more commonality of standards. Howell believes advisors, consumers and regulators need to share the responsibility in creating a better informed consumer.
Clients’ service expectations are higher today than before the financial crisis, Howell pointed out. Consumers expect that those providing financial advice understand their product offerings. “Consumers increasingly expect more choice [when it comes to products and services,]” said Howell, “so knowing what you’re selling is key, particularly when dealing with complex products.”
Advisors at the table
Canadians do not feel economically safe and heath care is their number-one concern. These and other findings by government strategy firm Ensight were part of the symposium’s keynote speech given by Jaime Watt, the firm’s principal.
Watt offered an introspective postmortem of the 2011 spring federal election results that saw a Conservative majority elected and a massive surge in NDP power. The political strategist parlayed his analysis into a discussion about the opportunities he sees for advisors going forward. Specifically, he identified health care, pension reform and financial literacy as the areas where he believes advisors can play a major role, adding that financial advisors have an important perspective to offer government.
Watt thinks advisors and associations like Advocis working together to raise the financial literacy levels in Canada could be a successful brand-building exercise. “If you can take the time to do this on a national, co-ordinated basis, then I think you’re going to see some pretty spectacular results.”
New Realities
“If organizations are to succeed in the new normal, they must focus on what has changed and what has remained the same for the customers, companies and the industry,” said plenary speaker Denis Berthiaume, senior vice-president and general manager, wealth management and life and health insurance, at Desjardins Group.
In his presentation, “Co-operating in the Age of the New Normal,” Berthiaume talked about new realities for the insurance industry in the wake of the financial crisis, and their implications for the industry.
“Clearly, the new normal will have significant impact on the way insurers design and price their products,” said Berthiaume, attributing these changes to low interest rates and the adoption of new accounting standards.
Adding to these challenges is what Berthiaume described as the twin challenges of “exit strategy” (those near retirement not having enough funds to retire) and “barrier to entry” (the next generation of debt-ridden accumulators not having enough disposable income to fund their retirement).
“For advisors, helping this next generation will require new skills and new tools ...” While communications and technology will be among those tools, Berthiaume doesn’t believe they will ever replace human contact or good advice.
The Advisor Perspective
At the retail level, financial advisors play a crucial role in helping consumers identify and understand the financial products that best suit their current and anticipated future needs. As products continue to evolve and become increasingly complex, that role will become even more important.
The final panel of the day included four financial advisors who weighed in on how advisors are adapting to the pressures of new products and new regulatory responses, and the impact these converging pressures could have on financial advice in the future.
“One challenge for consumers, advisors and the companies is that each of the banking, insurance and securities sectors has their own regulators who all take a somewhat different approach to the regulation of products and services,” said industry veteran Jack Snedden, CFP, CLU, CH.F.C., of Executive Retirement Planning Inc. “This is a significant problem as the cost to advisors who operate in more than one sector is steadily increasing.”
The result, Snedden continued, will be fewer new financial advisors, resulting in decreased access to financial advice. He urged regulators to work with advisors — who have an understanding of consumer needs — to not only promote new advisors but to also ensure Canadians are educated about the benefits of working with an advisor.
“Absent our advice, consumers can’t make those investment decisions,” said Advocis chair Dean Owen, CFP, CLU, CH.F.C., pointing to the example in the U.K., where the number of advisors has been reduced to 50,000 from 150,000, and Australia, which has seen its advisor population decrease by 70 per cent, because of recent regulatory changes to advisor compensation.
Owen provided an overview of the work Advocis is doing on behalf of its members with respect to advisor compensation and other issues. Specifically, the association’s regulatory affairs department has been offering input to regulators and policymakers in five key areas: 1. professionalism of financial advisors; 2. regulatory convergence; 3. distribution of financial services and compensation; 4. supporting the business of financial advisors; and 5. improving retirement income and financial security of Canadians.
“When Advocis speaks to regulators about ident-ifying the problem prior to considering regulation, it’s close to what the OSC calls ‘evidence-based’ or ‘strong evidence’ in Alberta,” he explained. “… it’s understandable that Canadian regulators are watching what is transpiring globally … but I would caution that taking action absent the model that Advocis promotes to policymakers could have dangerous and unintended consequences.”
Curtis Findlay, CFP, FLMI, of Compass Financial Planning Services Ltd., continued the discussion with a look at the factors generating new products and how advisors can better assess them. “Just because we have a license doesn’t mean we understand the product,” he said.
Findlay recommended advisors develop a product selection process that includes a checklist of questions such as: whether the product fits your practice; whether the product fits your profile; whether the tax implications are explainable; and whether the client reporting is timely and clear. He also suggested advisors reduce the number of products they offer in order to understand what they’re selling and stay current on product changes.
The pace at which financial and insurance products are developing will only intensify, and advisors need to be prepared to face change on this front and others, said Terry Zive, CLU, CH.F.C, CHS, FLMI, TEP, president and CEO of Zive Financial.
“We must promote professionalism as the necessary and best response to the challenges and opportunities our industry faces,” he added.
While government and regulators support the notion that those who receive financial advice have better financial outcomes, not all advisors are created equally. Consumers need to be assured, therefore, of a consistently high standard of advice, which, Zive argued, can only come from mandatory membership in a professional association like Advocis.
“It’s absolutely critical that consumers know that when they’re dealing with a financial advisor, they are dealing with a professional who has a common, high degree of knowledge about the products and services they are providing,” Zive concluded. “In my opinion, consumers can only be properly served by the established common standard that all advisors can be measured against.”