High levels of stress about money make it clear we need more and better financial advice for non-wealthy people.
Technology will be a big part of the answer, whether it’s through do-it-yourself apps and online tools or a portal that lets financial planners and advisers interact with a broader range of clients. The goal should be to create an ecosystem of advice that is separate from the big banks and their branch networks.
Banks are retail chains selling house-brand financial products. They are not the answer to the country’s need for better financial advice because their job is to sell products such as mortgages, credit lines, credit cards and mutual funds.
Getting the banks to be better advice providers is a continuing project of regulators and governments. The federal Department of Finance is reviewing a decision by big banks to stop selling third-party mutual funds, and the Ontario government has raised concerns as well. Ontario Securities Commission CEO Grant Vingoe said in a speech earlier this month that advice from bank branches must be more proficient, and that independent products should be available.
It’s fine to push banks to provide better advice and offer more choice because so many people rely on them for financial guidance. But these moves could also lull people into thinking banks are becoming more customer-focused in their advice. Whatever changes regulators require, the goal at every bank branch will continue to be selling bank products.
The third-party mutual fund issue is getting a lot of attention because the share of the fund market controlled by banks has grown over the past 15 years while the footprint of independent fund companies has shrunk. Mutual funds remain an accessible way for the masses to invest and competition is essential to promote lower fees and better products.
Banks at one point sold third-party funds to project an image of unbiased advice from the financial planners they were introducing into their bank branches. Third-party funds were dumped a couple of years ago by several banks in response to rules requiring sellers of investments to have an in-depth knowledge of these products. Banks, in a move that says a lot about their self-interested mindset, decided to interpret this rule as meaning their planners could only offer in-house products.
Once you free yourself from the idea that a bank branch is a place to go for unbiased advice on your finances, it seems logical that banks only sell their own funds.
Banks love to weave the term “advice” into their marketing, but it’s used in the loosest sense – as in, “buy these funds, have this credit card and borrow this much on your mortgage or credit line.” Objectivity is not the goal – moving product is.
This isn’t a moral judgment. Banks are publicly traded companies with an obligation to shareholders to produce higher share prices and dividends. We expect more of them because they’re so ingrained in Canadian culture. Bank branches on so many city blocks, bank towers downtown, bank sponsorship at cultural and sports events, bank experts widely quoted.
The retailing analogy for banks needs refining. Banks aren’t supermarkets selling all brands. They’re more like the new vehicle showroom at an auto dealer. You don’t walk into a Ford showroom and expect the sales team to have Toyotas and Hyundais on their product shelf.
Nor should you expect an unbiased take on SUVs versus cars, or EVs versus hybrids. You’ll be sold what the dealer has to offer, just as bank branches do.
There’s a tonne of competition in the vehicle market, including relative newcomers such as Tesla, Polestar and Rivian. There are plenty of competitors in financial services, but not that much competition. The banks are that dominant.
For this reason, the strategy for improving financial advice must focus on fostering competition more than flogging the banks to be something they’re not and never will be.
Heard of the phrase open banking? It means requiring banks to share client data in a secure and private way with technology companies offering new ways to provide financial services.
The federal government is working on rules for open banking in Canada. Getting them right could change banking and financial advice in a way that makes a difference.
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Rob Carrick