The strategy some investment advisers are using to defeat regulatory reform of the way they're paid brings to mind dog food.
Or maybe cat food. What exactly do seniors who didn't save enough money eat, anyway?
It's the kind of detail that naturally flows from a recent academic report on what will happen in Canada if regulators modernize the way investment advisers are paid. The idea regulators have is this: Investors would pay advisers directly from their accounts, rather than having the fees hidden in the cost of owning mutual funds.
The report's headline sums up the counter-offensive from the advice industry: "A Major Setback for Retirement Savings: Changing How Financial Advisers are Compensated Could Hurt Less-Than-Wealthy Investors Most." The report was written by Pierre Lortie, a senior business adviser at the Bay Street law firm Dentons Canada LLP, and published by the University of Calgary's School of Public Policy. It was released in time to be part of the Ontario Securities Commission's decision-making on advisory fee reform.
The benefit of the reforms would be to improve transparency for investors and turn the advice business into a true profession of experts providing services to clients and charging for them upfront. A lot of advisers and the businesses that employ them are worried, though. They fear investors will balk at paying fees directly, causing a drop in fee revenue.
The advisers don't put it like that, however. They say the reforms would cause some advisers to leave the business and result in some firms focusing on high-net-worth clients at the expense of people who aren't rich. The Lortie report warns of a cost to these shifts. At a time of concern about the country's readiness to retire with financial security, less advice would be available.
Investors, you'll be fine. Already, a new generation of advisers is emerging to serve clients of any wealth level, rich or not, experienced investor or beginner. These online advisers, also called robo-advisers, provide an effective retirement savings foundation. First, they find an appropriate mix of stocks, bonds and cash for your needs, then they build a simple portfolio using exchange-traded funds. Fees are clearly displayed and paid upfront by investors.
There are now roughly 10 online advisers in Canada, the newest entrant being Justwealth and BMO SmartFolio. Bank of Montreal is the only big bank to get into this business, but more are coming. All online advisers are similar in that you interact with them online or by phone to discuss your investing goals and risk tolerance, then receive a portfolio that suits your needs. In most cases, the portfolios are built with low-cost ETFs.
The early narrative on online advisers was that they were primarily something for millennials. However, some firms operating in the Canadian market say their average client age is between 40 and 50. Online advisers themselves are diverse – some are simply about helping you invest intelligently, while at least one is building a specialty in retirement income planning.
The idea that investors will be adviser-less if fee reforms are made is wrong. So, in some cases, is the line from Bay Street that working with an adviser means receiving actual advice and retiring well. Some advisers provide varying combinations of financial, estate and tax planning, while others are just mutual fund salespeople who match investors with investments to generate commissions. Mutual fund sellers are no thin blue line protecting us from a retirement crisis.
We can't even be sure these salespeople are making the best choices for clients. Under the current system of compensation for many advisers, remuneration varies according the type and brand of mutual fund sold. Regulatory reform of fees would eliminate this potential conflict.
Regulators have another answer to the issue of clients not getting appropriate advice – they're proposing a "best interest" standard. This would require advisers to put clients first and would replace the current requirement for recommended investments to simply be suitable. As the year rolls on, we'll hear more about how regulators will proceed on best interests and the unbundling of fees from mutual funds.
In the meantime, don't worry much about losing advisers. We'll be well rid of the ones who go, a point that many of Canada's quality advisers will agree with me on.