The Canadian financial services industry is facing some existential challenges. Over the past decade, the investment sector has seen a slow decline in best practices and value-driven client service. Consumers have taken note of this industry shift and the results are worrisome: investor trust in financial professionals in Canada has taken a sharp turn downwards from 2013 to 2015. Recent surveys further demonstrate this erosion in trust— a 2015 survey by the CFA Institute and Edelman indicates that only 61 per cent of Canadian retail investors and 57 per cent of institutional investors trust the financial services industry to do what’s right. It’s time the investment industry engaged in some much-needed introspection on what its future will look like.
The outdated traditional advisor-client model is largely the cause for shortcomings in client satisfaction and trust. Investor surveys cite low transparency in investment practices and fees, weak lines of communication, and a discrepancy between fees and delivered value as primary reasons for their distrust in the current system. In addition to issues of transparency, communication and value, recent compliance reviews by regulatory body IIROC reveal that most investment firms do not have the required means to identify, deal with, monitor and supervise compensation-related conflicts. These factors individually contribute to overall feelings of disenfranchisement and decreased trust in investors towards the financial advice industry.
However, faltering investor trust isn’t a reality the world-over. While retail investor trust levels have decreased in Canada since 2013, other jurisdictions (such as the US, UK and Australia) have seen significant increases in retail investor trust. The positive sentiment generated in these countries is a result of proactive steps by industry members to regain investor trust. In the case of the UK and Australia, both countries have gone through fee disclosure enhancements to empower investors to understand how much they are paying. Investors are willing to pay for fees, even higher fees, if they feel these costs can add value. While Canada can use its UK and Australian counterparts as viable archetypes for improvement, the larger issue of investor mistrust requires an overhaul of several features of the current advisor-client model. Some of this will come with new reporting requirements through CRM2, but investors themselves need to be asking tough questions of advisors.
Asking the tough questions
How much am I paying in fees? How are you compensated? What are your qualifications? What services do I receive? These are some of the difficult questions that investors need to ask when seeking out financial advice.
Adhering to a fiduciary standard ensures that an advice professional will always act in the best interest of the client. Surprisingly, the vast majority of advice professionals are not held to such a standard. Rather, they are held at best to a standard of suitability whereby recommendations may not be in the best interest of the client. Ask if your advice professional is held to a fiduciary standard, and if not, then understand that any advice that you receive may not be in your best interest, which defeats the purpose of getting advice!
Technology transforming investment advice
Online investing, which has been gaining profile in recent years, is a natural progression within the financial services industry that meets the needs of the modern investor. It’s a model that addresses the growing demand for portfolio management that delivers exceptional value at a low cost, without compromising on trust. Integrating technology into the investment process allows more investors to obtain access to honest and sophisticated investment advice and management.
This is evolution. We have seen time and time again, how technology and innovation have transformed industries. Full-service gasoline stations have been nearly eliminated in favour of cheaper self-serve stations. Email is gradually making traditional mail service redundant. Automated checkout stations in grocery stores are replacing cashiers. And a little closer to our industry, online banking is emerging as the preferred way of banking, replacing traditional tellers and branch banking. In fact, according to the Canadian Bankers Association, over half, 55 per cent, of Canadians prefer to do their banking online – that is a pretty powerful message. Online financial advice and investing is a natural extension of online banking, and we can anticipate that this trend will continue to grow and transform the financial services industry as well.
Written by Andrew Kirkland, President of Justwealth