Actuary expert provides growth opportunity for advisors

Under new program advisors would be able to invest client capital in pooled funds offering lower expenses and pension-like advice.

The top 5 Canadian pension funds in terms of total assets averaged a return of 14.2 per cent in 2014 making them the envy of pension funds everywhere.

Well, if one actuarial expert has his way, most Canadians could soon be able to investment in pension-like vehicles with their insurance advisors providing the gateway into this rarified world of investment riches.

“The government makes it possible for institutions and agencies to create large pooled Retirement Income Funds to which any worker can contribute (within some tax limits). After a very short establishment period, these funds must achieve a minimum size (at least $10B in short order but even larger later),” says Robert L. Brown, retired professor of actuarial science at the University of Waterloo and an expert commentator for the Evidence Network. “The funds must have a Board of Directors of experts who will guarantee good governance and guarantee that the plan participants' needs are paramount and more important than any agent within the system. Expense ratios will be capped (and policed). Forty basis points (0.40 per cent) seems appropriate since many larger pension plans today operate with expense ratios below 25 basis points.”

While 40 basis points might not get you rich it certainly must be considered what’s in the best interests of your clients. You’re providing pension-like investments at one-fifth the average Canadian mutual fund management fee. Even if you charged your client one percent on top of that 40 bps, it’s still a great deal.

“You would be automatically enrolled, with an automatic payroll deduction if you are not in a Registered Pension Plan — but you can take action to opt out.  This ‘nudge’ (according to the evidence) should result in ultimate participation rates in the 80 to 90 percent range.  But, it will also allow poorer workers to opt out, as they should,” says Brown. “You and the fund will decide on your retirement income goal stated as a Defined Benefit.  From this goal, one would subtract the benefits anticipated from OAS and CPP.  The balance is what the fund is meant to provide.”

The commoditization of asset management is a trend we’re seeing throughout financial services. Brown’s proposed idea, if taken up by insurance companies, could mean a bright future for advisors beyond selling expensive segregated funds to clients.

“It can be done. It just requires some imagination and a few (but important) tweaks to existing pension and income tax laws.  Canadians want this. They deserve no less.”