PrefBlog

The University of Calgary School of Public Policy has published a report titled A MAJOR SETBACK FOR RETIREMENT SAVINGS: CHANGING HOW FINANCIAL ADVISERS ARE COMPENSATED COULD HURT LESS-THANWEALTHY INVESTORS MOST:

Nevertheless, one thing arguably more problematic than clients receiving potentially conflicted advice is clients not having access to any advice at all. And based on the experience of other jurisdictions that have ordered fees to be unbundled and instead be structured as upfront fees, that is the result that ends up occurring for investors below a certain income level. In the U.K., after the decision was made to unbundle fees, the number of financial advisers fell from more than 40,000 in 2011 to just over 31,000, and has not recovered. Major banks, meanwhile, cancelled their financial advice services for clients that had only modest assets. The opening of investment accounts worth less than 100,000 pounds fell by half. After Australia required fees to be unbundled, there was a similar effect.

There is little to suggest that Canadians would not be left with the same income-related “advice gap” were regulators to require fees unbundled here. Simply put, many clients are unwilling to pay upfront for unknown results. And any reform that causes investors to separate from their advisers, or to never hire one, would be counterproductive to the public policy goals of helping Canadians better prepare for retirement. If it is adviser conflicts that regulators are worried about, there are better ways to address them — for example, the regulatory regime governing fiduciary duty and the potential to enhance the competencies, proficiency and professionalism of financial advisers — than creating a system that results in fewer people providing financial advice, and fewer people willing to seek it.

One self-styled investor advocate asks ‘Is conflicted advice better than robo advice?’, which I will assert does not just miss the point but shows a fundamental lack of understanding of how the market really works.

The alternative to a relatively high-fee mutual fund account is not a balanced ETF portfolio. The alternative to conflicted advice is not robo-advice. The default investment position of most investors with modest sums to invest – and sometimes not so modest! – is a package of GICs, bought on the advice of that nice young man at the bank who explained about ‘laddering’.

This point is actually confirmed by an opinion piece that seeks to discredit the ‘advice gap’ concept:

Consumer Panel chair Sue Lewis said: “Consumers do not always seek professional advice, even when they could benefit from it: some are not aware of what is available; they do not want to pay for advice because they do not understand the price or value of it; they cannot afford it; or they prefer to take decisions themselves.

“We would emphasise that financial advice is the same as many other professional services. People pay for professional services in other areas, such as for accountancy advice. Some people can afford this, others can’t.

“Services are accessible to those who need them at the market price.” Yet fellow consumer group Which? believes the advice gap is a real issue, given the barrier of the cost of advice.

Figures obtained by Money Marketing show that based on 1,000 UK adults with between £10,000 and £50,000 available to invest, Which? found 58 per cent of those against using an adviser cited advice as being too expensive. One-third said they would not trust an IFA to act in their best interest.

But the Which? data also suggests the demand for advice is not as high as some would believe.

The research found 67 per cent of respondents have never considered using an adviser for advice on a specific investment.

Nobody that I know of is actually arguing that there are people looking for advice who can’t get it; at least not as a significant part of the argument. At the low end, it’s all marketing, it’s all sales, it’s all about convincing somebody that they want something they haven’t really thought about before. Some of these salesmen are nasty predators. Most of them are just guys trying to provide a service and thereby make a living. As investment advisors, they’re not so hot. As conduits to get people into halfway reasonable portfolios that capture some of the equity premium and are a hell of a lot better than a package of GICs … they’re better than any alternative I’ve seen to date.

This entry was posted on Friday, April 15th, 2016 at 10:59 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.