With clients more risk-averse than ever, it’s imperative that advisors place a greater emphasis on holistic wealth management, according to a group of panelists who spoke at Morningstar Canada’s annual Investment Conference in Toronto on Wednesday.
Although markets have bounced back since the 2008 global financial crisis, clients are still fearful of investing in traditional equities and have opted for products such as guaranteed investment certificates, said Goshka Folda, senior managing director with Toronto-based Investor Economics Inc.
“The painful memory of the bear market lives on in clients’ minds and continues to drive decisions to [move to] safe investments such as fixed-income and guaranteed investment certificates,” said Folda.
About 34%, or $1 trillion, of aggregate Canadian savings is held within these products, she added, and “that’s a lot of money that isn’t finding its way to longer-term investments.”
In turn, with clients favouring safer investment products, advisors need to broaden their advice offerings, said Charles Sims, president and CEO of Mackenzie Financial Corp.
“The advisor’s job has become risk management,” he said. “They are spending more time with clients talking about their financial liabilities, how to pay off mortgages, and their insurance needs.”
And with the average Canadian inching closer to retirement, many advisors have seized the opportunity to focus on retirement planning, Sims added: “Advice is no longer geared toward risk avoidance, but assessing what a client’s future saving needs are and best positioning a portfolio to meet those needs.”
In fact, $4 of every $10 invested in the market today belongs to households in which the principal investor is age 65 or older, added Folda.
In terms of the client trends advisors should be wary of, the rising popularity of online discount brokerages is a major consideration. Although the majority of clients use a full-service brokerage to make trades, it appears more clients are trying to trade on their own, Folda said.
“When times get tough … clients [do not leave] their advisors, but they have begun to complement their advisor relationships with online [trading],” she pointed out.
Currently, online brokerages account for about $250 billion of the trading value in Canada, while full-service brokerages account for about $800 billion, Folda said. In addition, exchange-traded funds have also grown in popularity, totalling $50 billion in Canada, she added.
These trends represent an opportunity for advisors to reiterate the host of services and products they provide for their clients, she noted: “This is a time for advisors to articulate what it is that they do for clients, how they apply asset allocation, and how they deal with risk management and retirement planning.”
In response to these client trends, the Investment Industry Regulatory Organization of Canada (IIROC) has been focusing on helping the industry to provide better disclosure to clients, specifically in the area of advisor compensation.
When surveying clients, it’s clear many do not understand how their advisors get paid,
said Susan Wolburgh Jenah, IIROC’s president and CEO.
“We want to raise the bar on [disclosure],” she said, “and we want to know that if clients have a choice in how their advisor is compensated, that they are aware of that.”
Confusion in the area of compensation can often lead to client complaints, Wolburgh Jenah added. “We assume that people know a lot more about the inner workings of the financial services industry then they do. … It’s up to the industry to help bridge that gap.”
To ensure that clients understand the cost of advice, Sims has observed that many advisors have moved away from selling products with deferred sales charges and are now selling mutual funds with front-end fees instead.
“In the 1980s, 85% of advisors charged a DSC on a transaction,” Sims said. “Today, that’s closer to 40%.”