The debate over how advisors should be compensated evolved into a new phase yesterday with the release of a major new report from Advocis and PricewaterhouseCoopers.
The report, Sound Advice: Insights into Canada's Financial Advice Industry,
highlights the significant economic contributions that financially-focused small-and-medium sized businesses (SMBs) make to the Canadian economy. The stats provided in the report make a strong argument for an “as-is” approach to the Canadian financial advice sector.
According to the report, the SMB sector directly employs 182,000 people and contributes $19 billion to GDP. Indirect spin-off benefits from the sector account for 1.4% of Canadian GDP and 1.5% of total Canadian employment. The financial advice industry is largely comprised of single-person business entities and has a larger impact on the economy than either the pharmaceutical sector, motor vehicle manufacturing, or the aerospace industry.
According to the data, the vast majority of Canada's financial advisors (80%) are small or medium sized businesses; the typical Canadian advisor is over 45 years of age; has been in business 10-20 years or more; has 2-3 employees; serves 200-300 clients; generates revenue of $100,000 to $150,000 and is dual-licensed. According to the authors, these small-and-medium-sized financial advisory businesses are "well-positioned to provide comprehensive and accessible financial advice to a mass market of more than 12 million low and middle-income households in Canada with less than $100,000 in financial assets."
"The SMB financial advisors play a unique role in the financial advice industry by virtue of the range of products and services they provide, the consumers they serve, and the value they provide those consumers," said Davis Yoo, co-author of the report and a senior advisor at PwC.
The mass middle-class Canadian market is key base for SMB advisors. Among the 80% of Canadian households that have less than $100,000 in assets are the families and individuals most in need of financial advice. But this sector would be under-served if Canada moved to a fee-only model as some other countries have done.
As the report points out, reforms implemented in the UK and Australia -- particularly those banning sales commissions and requiring advisors to have fee-for-service arrangements with their clients -- have led to an increase in costs for financial advice. The consequence is that financial advice has been put out of the reach of many low and middle-income individuals. In Australia, the Future of Financial Advice (FOFA) reforms banned embedded commissions, established a best interests legal duty and expanded requirements regarding fee disclosure. Similar reforms in the UK have resulted in a large percentage of advisors leaving the business, an estimated 25% in the UK according to the report. These changes increased the costs to serve investors by more than 30%, and compliance costs for advisors have amounted to AUD$700 million.
As it is in Canada the vast majority of clients pay for their financial advice through sales commissions, rather than by fee-for-service. Reforms similar to those in Australia and the UK, if transplanted to Canada, would upset this balance. The study warns that "any measures designed to improve investor protection must be balanced with the need to ensure continued access to financial advice for the mass market."
"We need a system that serves investors at all income levels," says Greg Pollock, President and CEO of Advocis. "Given Canadians' concerns around cost of living and retirement readiness, it's critical that more people -- not fewer -- are able to seek professional financial advice."
The study suggests an alternative to simply banning commissions. "If we can get to a disclosure model that's appropriate, then consumers could make the choice," says Pollock. "If my embedded commission is $1,000, or whatever that number is, then you have a choice, as long as they disclose that."
The report also suggests advisors get ahead of regulatory changes by adapting the current frameworks; getting educated and demonstrating their expertise to clients; and responding to the change in client preferences by becoming more accessible online.
The full-text of the report can be found here