Ian Russell is president and CEO, Investment Industry Association of Canada. Michael Williams is chief risk officer and CCO, Richardson GMP Limited
Survey after survey indicates the three fundamentals in life that Canadians value most are health, education and wealth – the means of ensuring a desired lifestyle for the individual and extended family, including a secure retirement.
Building and sustaining wealth has become more difficult in recent years due to confusing, unprecedented and turbulent financial markets; complex investments; stubbornly low interest rates; increased regulation, and a proliferation of differing types of investment accounts and investing techniques. The 2008 financial crash was a wake-up call to investors on the vulnerability of their savings, bringing home the recognition that, while financial investment is critical to earn portfolio returns and build savings, investing comes at the risk of losing them.
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Headlines in today’s financial news are dominated by three themes: turbulent, ever-changing globally integrated financial markets; extensive, ongoing regulatory reform in all aspects of the investment business across all jurisdictions; and the emergence of potentially game-changing technology in the financial sector. In recent years, regulators have brought forward rules to make markets safer for investors and more transparent and easier to understand and navigate, and to improve the standard of adviser conduct. Regulators have also taken steps to improve the financial literacy of Canadians – the Achilles heel of our financial markets – by helping investors know what they don’t know, and, in this era of the aging baby boomer, developing specific rules and guidelines to facilitate dealing with elderly and vulnerable clients.
But while sound regulation is a necessary condition to provide greater clarity for investors, and higher standards of proficiency and professional standards of conduct for advisers, it is not sufficient to ensure the accumulation of wealth. And while improved technology can bring efficiencies – reducing transaction costs, providing convenient access to financial statements and market information (particularly through digitized platforms and mobile devices) and opening up new investing techniques, like self-directed or order-execution-only accounts, and online robo-investing platforms – it is not an effective answer for investing in complex and unpredictable markets. Algorithmic trading models, such as the robo-investing platforms, and artificial intelligence, are ineffective in financial markets that are unpredictable and bear little resemblance to past patterns. What is needed is experienced advice, with calm objectivity, especially in roiling financial markets, to interpret market moves and underlying trends, and advise on portfolio adjustments. Good advice at times like these is often the difference between eventual market gain and permanent loss.
Fixation with themes such as market movements, regulatory reform and financial technology tend to obscure, perhaps, the most important ingredient for building sustained wealth, i.e. seasoned and trusted investment advice conveyed in an interactive adviser-client relationship, supported by a clear strategic long-term plan guiding investment decision-making and savings patterns required to meet investment objectives and manage risks appropriately.
The strategic plan lies at the core of the client-adviser relationship. Recent studies suggest that a large percentage of older, working Canadians heading into retirement and living much longer lives, may have inadequate savings to maintain their lifestyles in retirement.
This pending savings shortfall should force us to think differently. The regulators can encourage and guide best interest and client-first conduct through targeted rules. However, the investment dealer and adviser still bear most responsibility to achieve a professional standard of conduct through training, vigorous oversight and supervision of compliance with the rules, and a positive client-first firm culture. The task is challenging for advisers – working with individual clients with unique needs, managing an expanding array of complex financial products and services, applying innovative technology for both front and back office – against the backdrop of unpredictable markets. These challenges often obscure the critical need to encourage and execute the financial planning process for clients in the midst of managing the complexities and evolution of regulation and compliance.
Government and regulatory policy-makers must think outside the conventional paradigm to give advisers and their clients plenty of scope to meet financial objectives, rather than relying simply on making new rules to guide conduct to achieve certain behavioral outcomes. They need to focus on strengthening market efficiencies; to make sure new rules avoid unnecessary costs and unintended consequences; to review existing rules for continued relevancy; to rethink traditional barriers between investment management, accounting, law, insurance and financial planning to facilitate easier and more holistic wealth planning; and to introduce tax changes and behavioural incentives that promote increased savings and investment.