Why the ban on embedded commissions won’t create an advice gap

“If we got rid of (say) the bottom 20% of the advisor population, consumers would be conspicuously better off,” says a Canadian PM

Why the ban on embedded commissions won’t create an advice gap

In this special guest article, Portfolio Manager with Industrial Alliance Securities Inc. John De Goey explains why he disagrees with the belief that an end to embedded compensation would negatively impact Canadian investors.

“There is a line of thinking that has been put forward in some circles that an end to embedded compensation would lead to an “advice gap”, since the advisor population is likely to shrink.  I disagree with this narrative for two separate reasons.

The first reason is that changing how one pays for advice should not make any real difference to the investor, who would pay the same amount either way.  It certainly makes no difference from an affordability perspective.  Charging four quarters instead of charging a dollar for something might be a bit more annoying but the cost is unchanged, so the service no less affordable.  I have seen no evidence of why the cost of advice should be expected to rise simply because it became more transparent by being charged separately.

The second reason is that even if there was a reduction in the number of advisors (i.e. even if you disagree with my opinion above), the real test is in regard to access, anyway.

As it now stands, there are many informed participants who believe that Canada has way too many people in the financial advice business already.  The paper released by the Canadian Securities Administrators a year ago said as much.  A reduction (perhaps even a significant reduction) in the advisor population will not necessarily create an ‘advice gap’ shortage.  Instead, it may well constitute a long-overdue "right sizing". 

Let's look at this using some hypothetical numbers.  Actual numbers are nearly impossible to quantify reliably due to advisors holding multiple licenses and some staff being licensed, but not offering front-line advice.

Here’s the question: if we have 110,000 financial advisors in Canada, but need only 80,000, will there be a resulting ‘advice gap’ shortage of advice if 20,000 advisors were to leave the industry?  In my opinion, the answer is an obvious ‘no’, as we would simply move from having 30,000 too many advisors to having 10,000 too many advisors.

Stated differently, I believe we need to define the 'shortage' in terms of members of the public who want, need and are willing to pay for advice, but are nonetheless unable to find an advisor.   To date, the discussion has been framed by the people who talk only about the number of advisors leaving.  These people are pretending to be concerned about the public interest when, in my opinion, they are actually protecting the employment interests of advisors.  Not all advice is good advice, by the way.  My view is that if we got rid of (say) the bottom 20% of the advisor population, consumers would be conspicuously better off.  Call it addition by subtraction.    

My experience (and I have spoken with hundreds of advisors) is that virtually all of them are actively taking new clients.  That's especially true of advisors who take clients with under $100,000 to invest (I don't know of a single one of those who is not accepting new clients).  If there is such a looming shortage, then why do so many advisors continue to take new clients?  You'd think there would be no more room left in the inn for people who come knocking, what with the looming shortage and all.

Does anyone seriously think that investors at the low end of the financial advice spectrum will not be able to find advice?  While the exact nature of the financial advice and services may differ, people do realize that there’s a chartered bank (banks offer advice) at pretty much every major intersection in pretty much every city and town in the country, right?

Furthermore, this concern for access to advice seems to assume that the advice-givers are human.  There are now robo advisors that can do investing for people using artificial intelligence and there are robo planners that can provide other rudimentary planning services, too.  Virtually all people with small portfolios have relatively basic, uncomplicated needs. 

I understand that there are plenty of people who not receptive to change.  When Uber was first launched, taxi drivers complained.  When ATMs were first introduced, bank tellers were opposed to them.  I understand that they don’t like it.  I understand that they are threatened and that their livelihood is at stake, but these things are going to happen whether the people who are threatened like it or not.  Ultimately, there is no real debate that these developments were better for consumers.

The ‘advice gap’ logic is only relevant if the number of advisors currently in the business is about right to begin with.  Like many others, I believe the number of advisors in Canada today is far too high.  It is my belief that we will always have access to quality advice and that people who care about the interests of ordinary investors have nothing to fear – even if there is a sharp drop in the advisor population.”

John De Goey is a Portfolio Manager with Industrial Alliance Securities Inc. and the author of The Professional Financial Advisor IV.  Industrial Alliance Inc.is a member of the Canadian Investor Protection Fund (CIPF).  The opinions expressed herein are those of Mr. De Goey alone and may not be aligned with the opinions and values of Industrial Alliance Securities Inc. or  any of its affiliated companies.

Related stories:

Advocis responds to portfolio manager’s criticism
The debate over embedded fees: The readers strike back