Is the financial advice industry in Canada structured to help clients?

Structural issues in the financial advice industry in Canada may be responsible for certain adverse outcomes for clients but the path to progress presents a bit of a conundrum.

At the end of February the Ombudsman for Banking Services and Investments (OBSI) released its 2014 Annual Report – we paged through to the section where the OBSI publicizes the names of firms who refused to compensate investors based on complaints and OBSI compensation recommendations in 2014.   To those that label this “name and shame” approach a harsh campaign, the report highlights that it is not the OBSI’s choice, they are in fact required to publicize these cases under the terms in which the OBSI was created.   Furthermore, it’s arguable that it’s helpful to highlight these cases, both to raise the awareness of the general public and to act as warning for other industry participants.  The cases where firms refused to compensate investors represents a very small minority of complaint cases – in fact 99% of the cases brought before the OBSI have been resolved.  In 2014 there were 345 investment case files opened and 241 cases that ended with monetary compensation for investors.

The data is not sufficient to conclude the investment industry in Canada is crooked but reading the case studies in the OBSI report does make you wonder what might improve the situation other than using deterrent methods like “name and shame”.  Is it possible that there is something structural in the financial advice industry that is preventing more clients from having an optimal service experience?  Can it be improved?

Structural issue?

A person or family’s financial situation is very personal, often something they don’t even discuss with their extended family or close friends.  To invite someone else, an advisor, into the situation requires not only someone trusted but sufficiently competent to address a number of different areas.  To be truly beneficial financial advisors must spend much more time and effort understanding their clients’ financial and life planning needs than required by the typical know your client (KYC) obligations.  While investments are only one component of a comprehensive financial plan, the investment recommendations must be informed by many different aspects of a client’s financial situation.

The industry, in its current structure, is not truly beneficial for clients.  On one side there are independent financial planners or coaches who help individuals get organized financially, often charging an hourly or project fee to help review and improve areas such as cash flow and debt management, insurance needs, estate planning, retirement savings and others.  While they provide valuable advice and are likely very transparent about how they are compensated, they are rarely registered by a regulatory agency such as the provincial securities commissions to give investment advice or implement an investment plan.  On the other hand, the advisors and organizations that are registered to give investment advice are commonly compensated by selling product and have not built into their business models the time and resources sufficient to truly understand a client’s financial planning and therefore investment needs.  This structural separation between planning and investment advice experienced by many clients may be the source of some dissatisfaction and resultant adverse outcomes.

A conundrum?

We discovered the above dynamic partly through reading and partly through our own research and experience in advance of setting up Chalten Fee-Only Advisors.  Why aren’t more financial planners registered to give investment advice?  From our many conversations with financial planners there are two common answers.  The first is not surprising – that’s the way they have decided to run their business.  They like what they do, they help people and are sufficiently busy and compensated to keep it that way.  The other answer is that the registration and ongoing compliance requirements are just “too onerous” or “costly”.   Having gone through the registration process and also having worked and experienced securities regulators in other jurisdictions including the UK and USA we’d say “very thorough” or “rigorous” are more apt descriptions.  Whether perceived or real, any stringency to the registration and compliance requirements can’t be surprising given the complaint cases highlighted by the OBSI, the investigations conducted by Securities Commissions, and the anecdotal evidence known to many investment professionals and clients.  So does this present a conundrum? What can be done?

In a previous post I discussed whether innovation or regulation will drive change for investors in Canada and with respect to this issue I’m not sure forcing change through regulation or banning certain practices helps either.  On the other hand, increased communication between industry participants and customers and increased transparency will always facilitate progress.