It seems to me that the big narrative in the investment industry nowadays is that change is everywhere, and that it is relentless, imminent and happening at a faster pace than ever before. For some reason, however, I can’t really see it or feel it. It could be that I started in the business at a time when talk about increased regulation was already underway, and I am used it. What is far more likely, though, is that these proposed new rules are euphemistic in nature and do not really affect anyone who is running a half-decent practice.
Now, I don’t mean to disparage the regulators’ efforts to clean up the industry, but I believe they are somewhat missing the point. While there is considerable and growing regulation regarding the work advisors do and the products they sell, regulation regarding financial advisors themselves is minimal at best and non-existent at worst.
This is a massive problem, and its symptoms can be seen in the industry’s backlash against the IIROC’s new requirements for the reporting of investment costs and performance, the CSA’s move to consider a ban on embedded commissions, and the possibility of a ‘best interest’ standard. It is mind-boggling that such common-sense initiatives weren’t introduced years ago, and the fact that they are creating so much discussion is problematic in itself.
Just try to imagine another industry where you don’t receive a clear bill for services rendered, or where you’re uncertain about just what it is you’re paying for. Moreover, if such an industry existed for as long as the investment industry has been around, it would be hard to believe that increased disclosure or changes to the ways its operators receive their compensation would result in any material and significant improvement for its consumers. So why would anyone expect that this will be the case for our industry?
According to the most recent Investment Executive Dealers’ and Brokerage Report Cards, the average advisor in Canada is in his mid-fifties with more than 20 years of experience in the business. It’s difficult to imagine that someone with this much experience doing things a certain way would rather adapt to than circumvent the new rules.
And it’s very hard to argue that the investment industry has generally done a great job at informing and educating retail investors about the workings of the financial system and their place in it. In a recent survey conducted by Ipsos on behalf of Lowrates.ca, 57% of Canadians failed a test on basic financial literacy, and the few who passed attained a C or D grade.
Another study – the 2017 Fidelity Retirement Survey Report – focused on how Canadians near and already in retirement are approaching the next stage of their lives, and it indicated that almost seven out of 10 (68%) of respondents do not have a written financial plan. This is particularly troubling in the current environment of disappearing defined benefit pensions and low interest rates – committed professionals would surely double their efforts to inform and educate their clients. Why, then, did these surveys produce such poor results?
I believe the answer to this question lies in the low educational standards for the advisors who are supposed to be educating retail investors in the first place. It is incredible that the minimum academic training for an advisor consists of a couple of self-study courses that require fewer than 250 hours of reading. What is even more astonishing is that one does not need a university degree and that the passing grade for these courses is 60%. When I went to McGill a few years ago, such a score would have resulted in a solid C+.
This institutionalization of mediocrity is, in my opinion, far more pernicious than any other issue that has become a part of the public discourse regarding our industry.
The opinions expressed are those of the author and may not necessarily reflect those of Manulife Securities Inc. Manulife Securities Inc. is a member of the Canadian Investor Protection Fund and a member of the Investment Industry Regulatory Organization of Canada.
Ludmil Natchev is an investment advisor with Manulife Securities Inc. in Oakville, Ontario.