Greg Pollock is president and CEO of Advocis, the Financial Advisors Association of Canada.
The Canadian Securities Administrators' recent proposal to ban embedded mutual-fund commissions and force investors to pay directly for financial advice would cause far more harm than good. It would diminish access to financial advice for millions of Canadians who need it most, and for whom upfront hourly fees of $100 to $300 are simply unaffordable. Worse still, it diverts attention from more significant regulatory gaps that put investors at greater risk by failing to ensure the quality of the financial advice they receive.
The hazards of banning commissions have been felt in countries that have gone down this road before, such as Britain and Australia. According to research by the City University of London, following Britain's commissions ban, the number of financial advisers fell by approximately 25 per cent. At the same time, the revenue per client necessary to maintain a viable financial advisory business increased, causing advisers to target higher-net-worth clients and reduce their focus on those with less to invest. Similarly, Australia's reforms have increased costs associated with serving clients by more than 30 per cent.
It just doesn't make sense to implement these kinds of changes here, especially when Canadians need professional financial advice more than ever. Financial products are only getting more complex, so it's no surprise that the number of Canadians who consider themselves financially literate has dropped from 67 per cent to 60 per cent in the last year alone, according to the Credit Counselling Society of Canada. Meanwhile, household debt has reached record heights and there is a growing imperative to be more financially self-reliant in retirement, as the number of workers with an employer pension plan has dwindled to less than a third of the population.
Faced with these mounting challenges, we should be pursuing policies that expand access to sound and trustworthy advice, not diminish it. Academic research has confirmed that those who work with a financial adviser accumulate more wealth and are better protected than those who don't.
The real problem we should be tackling is that the current regulatory regime is ill-suited to ensure the competence of all financial advisers across the country. Most investors aren't aware that anyone can call themselves a financial adviser (in every province except Quebec) regardless of their education, training or accreditation from a governing professional body. This puts hard-working Canadians at risk of receiving questionable financial advice or worse, falling prey to fraudsters posing as legitimate advisers.
At the heart of the issue is an obsolete approach to financial regulation. Despite the fact that most Canadians now turn to their advisers for more than just one kind of financial product or service, the regulatory framework remains fragmented, with different regulators overseeing the sale of different categories of financial products, such as mutual funds, other securities and insurance. As a result, there is no effective industrywide oversight or disciplinary process. For example, if an adviser engages in misconduct so egregious in the course of selling a mutual fund that the Mutual Fund Dealers Association revokes his or her registration, there is nothing to prevent the same adviser from continuing to provide advice and sell segregated funds through their insurance licence.
What's more, under existing regulations, there is little assurance that an adviser's knowledge is being kept up to date, despite the fact the industry is constantly evolving and an adviser's understanding can quickly become obsolete. Requirements for continuing education vary widely by product and even by province, and in some cases there are no requirements for continuing education at all.
The bottom line is that all Canadians – regardless of their income or where they live – should be able to trust that the advisers they deal with are qualified to help them meet their financial goals and that their interests are protected and held paramount.
The best way to make that a reality is for the provision of financial advice to be legally recognized as a professional activity and to oversee financial advisers as we do all other professionals who provide essential advice and services. Just like lawyers, accountants and doctors, every financial adviser should belong to one professional body and be required to adhere to a common code of professional and ethical conduct, mandatory professional liability insurance, ongoing continuing education and a disciplinary process that has the authority to suspend an adviser who has wronged an investor.
Canadians should expect nothing less, because they deserve to know that their financial security is in the hands of true professionals.