One of the financial services industry’s most cherished arguments against efforts to enhance investor protection is that investors with relatively few investible assets risk losing access to financial advice if industry compliance costs increase to meet tougher regulatory demands. But, it turns out, many aren’t getting much useful advice from the industry now.
New research from the Ontario Securities Commission’s independent investor advocacy committee, the Investor Advisory Panel (IAP), finds that smaller and “mass market” investors receive little in return for the money they pay for financial advice.
Among other things, the IAP’s research indicates that many investors have minimal contact with their advisor. Almost one-third of investors report that they have never discussed financial planning with their advisor. And only a “small minority” say they’ve received advice about broader financial tasks, such as budgeting, managing debt, and tax and estate planning.
The so-called “advice gap” that the industry warns about – if regulators were to eliminate embedded compensation models or to raise conduct standards – already exists.
One possible inference from this is that regulators should roll back protections in an effort to lower compliance costs, enabling the investment industry to actually provide investors with more useful advice.
This would be the wrong conclusion.
To be sure, there is room to eliminate requirements that inflict needless costs and don’t do much for investors – and that is something that regulators are engaged in through their ongoing efforts to reduce regulatory burdens.
But that shouldn’t detract from the need to address the fundamental market failure that currently bedevils investors: embedded compensation models socialize the market for financial advice and prevent free-market competition.
When providing poor advice, or no advice, pays the same as delivering good advice, there’s no financial incentive to devote time and energy to ensuring clients get high-quality advice. This situation undermines the value of advice, and instead rewards sloth, incompetence and avarice.
Couple this market failure with the other core flaws in the advice market – that most investors believe they are receiving advice that’s in their best interest, when they’re often just getting advice that’s suitable – and there’s a clear case for regulatory intervention. Fear of the advice gap shouldn’t prevent action. The gap already exists – and it’s the inevitable result of an already distorted market for advice.