The new era of transparency in the financial services sector will be a positive shift for financial advisors, leading to more informed investors and fewer lawsuits, according to Mikel Pearce, partner with Dolden Wallace Folick LLP, who spoke at the Independent Financial Brokers of Canada (IFB) fall summit in Toronto on Wednesday.
Transparency has become a new reality for the financial services sector as the Internet provides investors with access to more information and as regulations require far more disclosure than ever before.
“A variety of things are happening in terms of legislation and the regulations coming out about what has to be disclosed to investors, and what kinds of information investors are looking for … and how detailed that information has to be,” said Pearce.
Although the prospect of compensation and investment performance being put into the spotlight raises concerns among many advisors, Pearce said the shift could be beneficial.
“We do think that transparency is a net positive for advisors and financial planners,” he said, “because the reality is, an informed investor is less likely to sue you if things go wrong.”
As clients with little investment knowledge rely more heavily on their advisors for advice and guidance, advisors working with those clients are more susceptible to complaints when markets take a downturn or investments don’t perform as expected.
Defending claims against those investors can be very challenging, Pearce added, as those clients can argue that they didn’t understand what they were investing in.
“If you can’t prove that they did know,” he said, “you have a big problem.”
In contrast, clients who have a greater level of investment knowledge tend to ask more questions and have a greater understanding of the risks they’re taking. As long as advisors keep detailed records of those conversations, Pearce said those clients are far less likely to have a successful claim against an advisor.
Although the investment industry has so far seen the greatest impact in the push for transparency, particularly with the new fee and performance reports required under the second phase of the client relationship model, Pearce said all players in the financial services sector should expect to face greater disclosure requirements.
“Everyone is going to have these obligations,” he said. “Even if all you’re selling is seg funds, and you don’t need a securities licence to sell those, it doesn’t matter. You’re going to have to disclose, and you’re going to have to give your clients more information than you have historically.”
Clients, who have become accustomed to accessing any information they want online, are largely driving the movement toward transparency.
“Clients are looking for this,” Pearce said. “They’re aware that there is more information available and they’re aware that they are entitled to more information.”
Millennials, in particular, tend to conduct extensive research about products and services prior to making a purchasing decision.
Although the abundance of unfiltered information available online may mean some investors are learning about investments from unreliable sources, the increased access to information can help investors educate themselves and determine what questions to ask.
“It’s a source of information that investors will use to generate questions to talk to you about,” said Pearce. “So, it can be a net positive.”
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