There’s much discussion taking place within the financial services sector on the delivery of, and payment for, financial advice. One way to address this issue for good is to help financial planners better meet the needs of financial consumers by realigning the value chain of financial advice.

This topic was recently discussed at an industry conference at which I was asked my views on the future advice model. More specifically, how advice will be delivered and paid for in the future. To answer this important question, I realized that I needed to analyze the current value chain of advice and how it needs to evolve in order to serve the financial needs of Canadians more effectively.

So, what is a value chain? It’s a step-by-step process in the development and delivery of a product or service in which value is added for the end customer at each stage. There are three main inputs to the value chain for the financial services sector. These are: the product manufacturers and distributors; financial advisors and financial planners; and regulators.

In this review, we will look at how the current value chain of advice is set up by each input — and some of each input’s related weaknesses. Furthermore, we will focus on mutual funds and insurance products and how they work within holistic advice:

> Products and services (manufacturers and distributors)

  • The existing embedded advice model through fees means a “one-size-fits-all” approach and less tailored advice for clients.
  • The current fee model pays too much for basic advice through mutual fund trailer fees at the expense of comprehensive holistic advice.
  • Similarly, insurance commissions overly reward agents for the sale of basic policies.

> Financial planners and financial advisors

  • The pace of new regulation and the potential need to transition to a fee-based or fee-for-service model from embedded fees is putting the advice channel is under stress.
  • Financial planners who adhere to higher standards are at a competitive disadvantage versus those who hold out but do not practice with these higher standards because financial consumers cannot distinguish the difference.
  • There are no common financial planning standards.
  • Graduates from university and college financial programs are not joining the financial services sector at acceptable rates.

> Regulators

  • The reach and pace of regulation is expanding; as a result, these new rules may ultimately restrict and increase the cost of advice.
  • The financial services sector is currently regulated by sector; namely, mutual funds, securities and insurance. This causes regulatory arbitrage, leading to inconsistent rules for financial planners and financial advisors and, consequently, inconsistent protection for financial consumers.

Partly due to this value chain, financial consumers believe that advice is free. They also have a lack of financial literacy and subscribe to the concept of short-term gains and risks versus long-term financial planning.

Thus, financial planners can better meet the needs of these financial consumers by realigning the value chain of advice. This can be done by focusing on the delivery of holistic advice as the driver of the financial decisions they make. Here are some opportunities in the value chain to achieve this objective:

> Products and services (manufacturers and distributors)

  • Unbundle advice from products so that products are sold in a holistic financial planning context. That way, advice drives product sales — not the other way around.
  • Redirect the money from embedded fees, if regulators eliminate them, to holistic advice services.

> Financial planners and financial advisors

  • Develop a financial planning consultancy business model over the existing sales business model.
  • Promote transparency and trust by adopting a “best interest” standard or a “fiduciary duty” for client engagements.
  • Adopt a professional model with one common financial planning standard for financial planners whereby only those adhering to this standard can hold out their services to clients.

> Regulators

  • Harmonize all rules across all sectors, regardless of regulatory jurisdiction, to ensure consistent protection of financial consumers and allow financial planners to deliver consistent holistic advice as their advice reaches across all these jurisdictions. (This is the most important issue for financial planners.)
  • Enhance education for all participants in the value chain and promote financial literacy for financial consumers.
  • Amalgamate regulatory bodies to reduce the costs in the value chain and, ultimately, the costs to financial consumers for getting advice.