A year of volatility, scandal and blame

The year 2009 will be remembered for many reasons in the financial services sector. The Great Recession reached its depths, with asset prices crumbling and unemployment soaring.

The S&P/TSX Index fell to 7,479.96 in March, before astounding investors with a meteoric return to a high of 11,816.33 in the fourth quarter. Investors who bailed out in spring lost their shirts, while those who heeded wise counsel stood a good chance of being made whole.

But never mind this obvious benefit of good advice. As is so often the case, advisor-bashing was very much en vogue in 2009, with a particular focus on compensation.

Blame the Advisor In May, an international study by Morningstar into the costs associated with mutual funds blamed advisors for high fees in Canada. The report claimed that funds with higher trailer fees are pushed harder by advisors and clients are essentially unwitting dupes.

In Australia, the Financial Planning Association, which administers the Certified Financial Planner designation there, decided that trailer commissions represented a conflict of interest and barred its members from accepting them.

In the UK, the Financial Services Authority announced it was banning commissions, essentially mandating a fee-for-service model for financial advice.

Scandal Perhaps of greater importance than the question of cost was the question of trust.

The Earl Jones scandal delivered a black-eye to the industry, as Canadians began pondering the legitimacy of their own advisors.

Never mind the fact that Jones was not licensed, had no credentials, and didn’t even really claim to be a financial advisor, his actions still managed to tarnish the industry by association.

But there was some good news on the legal front, as disgraced B.C. advisor Ian Thow was finally tracked down in the U.S. and extradited back to Canada.

Government, Law and Regulation While the costs of advice were being scrutinized, the cost of investing was set to rise, as Ontario and B.C. tabled budgets that included a Harmonized Sales Tax. With the vast majority of Canadian mutual funds domiciled in Ontario, the addition of provincial sales tax to the GST charged on fund services will impose a higher costs on all Canadians.

Prospecting for new clients — or even just contacting existing clients — became more difficult, when the Do-Not-Email list came into force in June.

As if advisors didn’t have enough to contend with, Registration Reform finally came into force in September.

Product challenges The free-fall of the financial markets threatened products designed to safeguard against these very events. In May, Sun Life began rolling back features on its SunWise guaranteed minimum withdrawal benefit product.

Advisors were incensed as the changes were to be applied to existing contracts and would force some very difficult conversations with clients.

Sun Life was not alone. In September, Manulife also retooled its IncomePlus GMWB product.

M&A One-time mutual fund giant AIC Funds was bought by Manulife Financial in August, boosting the insurer’s retail investments division to $13.7 billion in assets under management.

Among advisory firms, there were a pair of key consolidation plays, as GMP Capital and Richardson Partners Financial struck a deal to merge in July.

In October, Australia-based wealth management juggernaut Macquarie Group announced it was buying Blackmont Capital from CI Financial. The Aussies vowed to shake up the full-service brokerage industry, which has come to be dominated by domestic banks.

What lies ahead for 2010 is anyone’s guess, but if past is truly prelude to the future, the industry can expect a continuing cycle of consolidation and fragmentation on the product side; further regulation reforms; and, as always, more blame aimed at the financial advisor.

(12/31/09)