Most read: Warning: regulatory change could gut industry

PwC senior strategic advisor warns rash, reactionary reform could decimate a key Canadian industry.

Most read: Warning: regulatory change could gut industry
The recent report by Advocis and PriceWaterhouseCoopers about the role small and medium-sized financial advisory businesses in Canada has generated a good amount of attention--and with good reason. The report provides a macro picture of how important the advisory business has become in Canada. 

Commenting on the report, Byren Innes, senior strategic advisor at PwC, suggests that "We had a good idea of the numbers, but we didn't have a handle on the economics of this."

The report, Sound Advice: Insights into Canada's Financial Advice Industry, released last week, highlights the significant economic contributions Canadian financial advisors make to the Canadian economy. The numbers captured in the report generate a fascinating and comprehensive view of this key economic sector.

According to the report, small and medium-sized financial advisory businesses directly employ 182,000 people, contribute $19 billion to GDP, account for 1.4% of Canadian GDP and 1.5% of total employment. Some 80,000 businesses provide financial advice to a mass market of 12 million Canadian households, 80% of who have less than $100,000 in financial assets and who pay for their financial advice largely through sales commissions.

Interestingly, the survey finds that the advisor sector provides more employment now than the aerospace or automotive industries. As the economy has shifted from a manufacturing based one to a service-oriented economy, the advisory business has been one of the important sectors in terms of maintaining employment levels in the Canadian economy, clearly.

But the report also comes with a serious warning. According to the authors, the current access that the vast Canadian middle-class has to advisor services could be eroded if regulatory proposals currently being considered by Canadian securities administrators are adopted.

Recently, of course, reforms implemented in the UK and Australia has seen sales commissions banned. Advisors have been required to implement a fee-for-service model. The shifts have been chaotic and have had widespread negative effects—the cost of financial advice has risen so high, so fast, that having an advisor is being put out of the reach of many low and middle-income individuals.
According to the Advocis report, in the UK, a large percentage of advisors--up to 25% of the entire force--have left the industry. This has left many middle-class people without access to an advisor. The Advocis study warns that similar measures contemplated for Canada could lead to a similar gutting of the industry here. "I sometimes use the phrase 'good intension, unintended consequences.' The intent--better disclosure, transparency--is hard to argue with. But when you see what these things can do--25%, or 10,0000 advisors gone from the market place--you get unintended consequences," says Innes.

In the case of the UK, the effect of the reforms has been to see advisors drop middle-class clients and more toward more well-off clients in a search for fees. The consequence is that the middle-class is being left without access to a financial advisor. "The effect of this shifts have been to send the advisor up-market, which ends up taking services away from the middle class, which is where you need advisors," says Innes. “This is basic supply and demand. By reducing the size of the advisor force, the cost of advice has gone up.”  

Innes points out, rightly, that "study, after study has shown that having an advisor has a positive effect on the accumulation of assets over time. Having an advisor involved with a corporate dc plan will see more people enroll and contribute at a higher rate. Financial advisors do more than provide short-term financial planning advice. The longer the relationship with an advisor the more assets there are. Engaging in a long-term relationship with clients helps Canadians accumulate greater wealth and pave the way for better saving strategies and retirement planning. There is value to having an advisor," says Innes.
He goes on to make the point that there are already new transparency rules coming into play--so-called CRM2 rules--that will go a long way toward solving the issue of compensation disclosure. Innes makes perfect sense when he suggests the effects of the new current regulations should be allowed to take effect first before any new regulatory regime is contemplated. "Client education is part of this, for sure. The smarter the client is, the better they can understand what an advisor offers....I think the CRM2 will go a long way toward this. But I think we need to let the dust settle on those. Then we need to do some homework. We need to study our regulation needs to be examined for unintended consequences. Is this a problem? In Australia the costs are going to hit a billion and half. Fees have gone up 30%. Is this worth it? I would say, go slow, tread lightly, don't do a big bang change ....the way Australia did it," says Innes.  "Part of the issue is, when you look at UK and Australia....they were trying to fix a problem we don't think exists in Canada. There were financial scandals in England around pensions. The reaction was 'We need to fix something.' But we're not having those scandals here. Let's not try to fix a problem we don’t have.”