Earlier this week Advocis and PwC released a fascinating report warning that rapid shifts in the structure of the Canadian advisor industry could have extensive, unintended effects on this country's economy.
In an interview with Wealth Professional, the CEO of Advocis, discusses the report and warns on the pace of reform.
The study, Sound Advice: Insights into Canada's Financial Advice Industry
, has advisors talking. The survey paints a striking picture of the importance small and medium-sized financial service companies in the modern Canadian economy. But big changes being considered by regulators around compensation could seriously affect the sector.
As it is, tthere are more people working in the financial advisor industry than ever. More Canadians work in the financial advisor industry than in either the automotive or aerospace industries according to the survey. But proposed changes modelled on overhauls of the UK and Australian advisor industry could be coming to Canada. There is, according to the head of Advocis, a danger that such radical shifts could kill the golden goose.
Reforms to compensation structures in Australia and the UK followed on scandals in these countries. But the changes also had unintended consequences--in the UK the pool of advisors has shrunk by 25%, leaving many in the middle-class unable to access the services of an advisor.
"Canada has not gone down this road yet," says Greg Pollock, President and CEO of Advocis. "But there is an expectation there could be something coming." Two papers on the subject have been released. There is a sense something is in the pipe. "Regulators have been clear; they have not made up their minds. But something could be announced in 2015. That seems to be what they are saying. That looks like the time line," says Pollock.
In anticipation, Advocis and PwC prepared the report as a way to join the debate. Pollock explains it is an attempt to start a conversation. If there is one key message here, it is this: Reforms need to be paced and deliberate lest the Canadian economy suffer a serious shock. "In the UK, those who have stayed in the industry have given up trying to service smaller clients, and that has left many in the middle-class without an advisor," says Pollock.
The report mentions studies that find that when the average person works with an advisor the client accumulates more capital over their investing life. That is, there is a strong argument for ensuring advisors remain accessible to the vast mass of the middle-class. It is also pointed out that there are new transparency and disclosure regulations coming into effect, the so-called CRM2 regs. These changes will empower consumers to understand how their advisors are compensated, will enact a solution to whatever perceived problems are out there.
Pollock suggests, rationally, that the new transparency will be good for clients. These new regulations need to be absorbed by the industry first before any larger reforms are meted out. "This would be the alternative solution I would be thinking of. Collectively, we've put this new transparency regime in place. But these new changes have not been fully introduced at this point. Let's get that done, then test to see if this is effective. Then once we know how that works, we can work from there," says Pollock. "Let's let this go forward first. This is the story we've been trying to get out to people."
Many who read the report will be surprised to find out how large the advisory industry is these days. According to the report the Canadian small and medium-sized business financial advice sector directly employs 182,000 people and contributes $19 billion to GDP. When indirect spin-off benefits are factored in, the sector accounts for 1.4% of Canadian GDP and 1.5% of total Canadian employment. "I think it is important to recognize the importance of this sector to the modern Canadian economy. These people are employed, paying taxes, so let's be careful. Let's slow this down, get the new transparency regime in place, and then see where we're at before we do something drastic. We hope this reports slows them down," says Pollock. Which is eminently rational. Stayed tuned to wealthprofessional.ca for more on the report.