Much of the investment industry is eagerly awaiting the Canadian Securities Administrators' (CSA) consultation paper that is likely to propose eliminating commissions on trades of investment products.
Ever since bans on commissions were announced in the U.K. and Australia many years ago, many Canadian financial advisors have feared that Canada's securities regulators will follow suit, and that doing so will result in a big "advice gap." The CSA is leaving the door open - albeit narrowly - for an alternative to an outright ban.
The talk about an advice gap is a familiar argument. A ban on commissions - along with recently proposed reforms and a possible statutory "best interest" standard - would raise costs for firms and client-facing advisors. As a result, the industry would focus even more on higher net-worth investors (e.g., $500,000 in investible assets or more), leaving the majority of Canadians without financial advice.
This argument rolls off the tongues of industry lobbyists. It's a concern I'm hearing from investor advocates as well. And it's a legitimate worry. But the industry may have had a "stealth" advice gap for many years.
Investment Executive's (IE) latest Advisors' Report Card shows that surveyed advisors serve almost 300 client households each. This equates to about six client meetings weekly (assuming four weeks of vacation) if meeting with each client once annually. If clients get two in-person meetings per year, that implies 12 client meetings weekly - onerous when accounting for time spent working on files (e.g., planning, strategic thinking), keeping current on investment products, attending conferences, meeting with wholesalers, internal office projects, etc.
Most advisors segment their client roster. This results in larger accounts getting a lot more attention than smaller ones, who are lucky to get one face-to-face meeting each year. (These assumptions are based on IE's surveys.) I know of advisors with 500 or more clients. Yet, practice and relationship-management experts suggest a maximum of 75 to 125 client relationships per advisor.
As a result, clients with smaller accounts get little or no ongoing advice because the economic realities force advisors to focus on giving more service to larger accounts. So, there probably is an advice gap problem for smaller accounts already. They technically are "on the books" of an advisor. And even if we assume that they receive good advice up front, economics equate to little or no ongoing interactions and followup.
An advisor I know in Ontario says his clients' fees will rise under a commissions ban because his dealer's minimum percentage fee on fee-based accounts is more than the average trailing commission for most of his clients, including smaller accounts. An example he provided shows that gross commissions generated on his smaller accounts today is less than $1,000 annually, which isn't much motivation or compensation to book that annual review.
Regulators should pay attention to investors who won't be served well under its new rules and proposals. But, first, regulators need to understand the extent to which an advice gap already exists. Maybe this requires some research - or reaching out to speak with client-facing advisors and their clients.
Only then will regulators have a clearer picture of today's advice gap, how that might change under a commissions ban and how the gap can be filled.
Dan Hallett, CFA, CFP, is vice president and principal with Oakville, Ont.-based HighView Financial Group, which designs portfolio solutions for affluent families and institutions.
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