The World Economic Forum predicted in a recent report that most Canadians will outlive their savings by a decade or more. Think about that for a moment. And while you’re thinking, do the math.
If half of Canada’s 36 million people run out of money 10 years too early, just maintaining each of them at the poverty line’s $22,000 annual income level will cost $4-trillion for that decade of support. That’s about six times more than our current national debt. It’ll devour one-fifth of our gross domestic product.
Economists would call this an oncoming train wreck, yet policy-makers are treating it as no big deal. For the most part, they’re simply encouraging everyone to work longer. Make 72 the new 65. Problem solved.
Except it’s not that easy. Studies have found most people are forced into retirement earlier than they’d prefer because of declining health or the need to provide full-time care for a loved one. Also, late-career layoffs often become permanent thanks to pervasive workplace ageism. In reality, few people get to stay on the job into their 70s even if they want to.
So, what’s the answer? Spend less? That’s good advice for those engaging in frivolous consumption, but they’re not the norm.
Most people haven’t seen an increase in real income since the global financial crisis more than 10 years ago. Many live paycheque-to-paycheque just covering basics – and polls say an unexpected expense of a few hundred dollars is all it would take to tip 40 per cent of the population into insolvency. They have little or no room to economize, no private pensions accumulating for them and no ability to save meaningfully for retirement.
Like it or not, the rest of us are going to wind up paying for their old age in addition to our own. We’ll need to grow an awful lot of surplus taxable wealth to afford that. But growing wealth is hard – and most of us aren’t knowledgeable or skilled enough to invest successfully on our own. We need financial advisors to guide us.
The trouble is, if we’re not careful, the cost of that guidance will consume whatever value-add advisors can provide, and then some. Over the course of an investing lifetime, the compounding drag of commonly charged fees for investment advice and product distribution can easily strip out half the gains from a portfolio.
And that’s what makes a fiduciary duty so important. It gives investors the best possible shot at prospering because it enables them to get advice formulated entirely on what’s best for the investor, unfettered by conflicts of interest that usually involve high fees.
Some places – like Britain, Australia and even a few U.S. states – have imposed fiduciary or robust “best interest” duties on all advisors. Those jurisdictions have seen an interesting result: increased sales of low-fee investment products that yield higher net returns for investors.
That’s right – higher net returns. In other words, better advice, lower costs and more wealth creation.
With that in mind, the World Economic Forum penned these words as part of its prescription for averting a tsunami of bankrupt seniors:
“Advice must be comprehensible, accessible, priced effectively, transparent and aligned to the best interest of the advisee. The establishment of strong fiduciary rules by policy-makers should be of paramount importance to help meet these criteria.”
So, is that what we’re getting from our policy-makers? Not exactly.
In the U.S., the Securities and Exchange Commission (SEC) has finally enacted its so-called Regulation Best Interest rule (a.k.a. Reg BI). But the new law is widely considered to be weak – a result of concerted pushback by the investment industry.
The SEC opted not to impose national fiduciary rules on broker-dealers while simultaneously watering down standards that have existed for decades under the federal Investment Advisers Act of 1940. Eight U.S. states are now suing the SEC over this. They claim Reg BI fails to meet the forceful criteria required by Congress under the Dodd-Frank Act.
Meanwhile, Canada’s 13 provincial and territorial securities commissions couldn’t agree on rules categorically requiring advisors to act in investors’ best interests. Ontario and New Brunswick were in favour, but the rest felt this would be too radical a change from our existing, looser rules.
Instead, they hammered out a more modest set of standards – the “client-focused reforms” – that preserve current rules but infuse some of them with best interest principles. This compromise will enhance investor protection somewhat. However, it was accomplished by adjusting those best interest principles to fit the contours of the investment industry’s existing business models, not by requiring the industry to adopt fundamentally different practices.
The result is advisors will remain free to sell punishingly expensive financial products if those items are the most suitable investments on their firm’s product shelf. And they’ll be able to do so without having to assess how those products stack up against other options readily available in the marketplace. In other words, without regard to whether they’re objectively best for the client.
Which means we’re still heading toward the train wreck.
Years from now, when we’re struggling to support all those seniors who have run out of money, people will look back on this moment and wonder why we didn’t act more decisively in the face of a looming fiscal disaster.
Why, they’ll ask, was there so much concern about the consequences of imposing fiduciary rules to alter the way a limited number of advisors conduct business, when the consequences of not making those alterations meant imposing a staggering financial burden on everyone else?
But it’s not too late to avoid that outcome. We can still change course, though two things will have to start happening.
First, our regulators must enforce the newly infused rules rigorously to ensure those reforms are as meaningful as they can be. That’s the easy part.
The hard part is getting Canadian investors to become assertive enough to demand more than what the rules require. They’ll need to insist on receiving a fiduciary level of care from those who provide financial services, and they’ll need to shun advisors and investment firms who won’t pledge to adhere to that standard or who fail to meet it.
Unfortunately, we tend to be passive rather than assertive. We’ve paid heavily for that complacency in the past and unless we change this aspect of our nature, it will cost us even more dearly in future.
Neil Gross is president of Component Strategies, a capital markets policy consultancy based in Toronto.