Lessons from 20 years of Advisor’s Edge

If you look back to the June 1998 edition of Advisor’s Edge—the very first—you’ll find the following phrases:

“The Financial Planning Standards Council wants the CFP made a requirement for people holding themselves out as financial planners.”

“Forget about selling investment products. What the million-dollar client really craves is your advice.”

“Clients of the future won’t accept all of the information you provide at face value. And they will seek a second opinion.”

If you didn’t know any better, you’d think those statements had been made today. Indeed, these evergreen issues have come up time and time again in the 20 years we’ve been publishing the magazine.

That said, there have been major changes, especially in how clients view the advisor’s role and in their available options. We share insights from four people who’ve played a prominent role in the industry in the last 20 years, and in Advisor’s Edge itself.

Read below full interviews with former OSC commissioner Glorianne Stromberg, Rogers Group Financial founder Jim Rogers, Planex Solutions Financières’ Larry Bathurst, and Stewart & Kett principal Cynthia Kett.

These interviews have been edited and condensed.

• Glorianne Stromberg
• Jim Rogers
• Larry Bathrust
• Cynthia Kett

Click here for 20 tips, and to learn more about the Advisor’s Edge 20th anniversary.

Glorianne Stromberg, Securities lawyer; OSC commissioner (1991 to 1998)

“Stromberg’s back,” our inaugural issue touted. It was June 1998 and the industry was eagerly anticipating then-OSC commissioner Glorianne Stromberg’s follow-up to her groundbreaking 1995 report. Both reports have framed the discourse about financial advice regulation ever since—but not strongly enough, she argues. Now retired, Stromberg spoke to us in the kitchen of the same home in which we photographed her 20 years ago.

Advisor’s Edge What are your thoughts on the pace of regulation?

Glorianne Stromberg It has been extremely slow. The regulators have found it difficult to implement anything. They study issues ad nauseam, and listen to the same old arguments, but the issues have never gone away. The solutions are obvious, but the regulators listen to the industry as opposed to what’s right for investors.

AE What is the role of the financial advisor today?

GS Being a product salesperson is no longer what people want or need. With broad-based ETFs, investors have the benefit of all the sound investment principles at their fingertips. To remain relevant, the financial advisor will have to offer more than product. It goes back to what I said 20 years ago: a well-rounded financial advisor needs to be able to provide all-encompassing life-skills advice.

AE Yes—in 1998, you mentioned advisors needed to adopt a “client-needs focused approach.”

GS Those words were true then, but they’re true now even more. Along with mutual funds, the traditional current financial advisor may well become obsolete. There are new and better alternatives available. It’s discouraging that the individual investor has not been more proactive over the years. There’s been so much talk of investor education, which was a term that I never liked. I felt the focus should be on increasing knowledge and basic life skills, and I still feel that way. I’m not sure the current efforts at investor education are really addressing those things, and that’s discouraging.

AE What would the perfect advisor do for clients, then?

GS Look at each client’s special needs, goals and challenges, and be able to help them make good decisions in order to achieve what they’re trying to do. Investments are only one aspect. Lots of people need to start by understanding whether they should be paying down debt or putting money aside for a rainy day, or contributing to registered plans. An advisor coach would be able to help clients come to a plan at an early enough stage in their life so that they would have a reasonable chance of accomplishing their goals. It would be someone who could help them remove the stress from the uncertainty of life.

AE That’s a tall order.

GS It’s a very tall order. And nobody has all the answers, but at least somebody with experience should be able to help guide a client. And the first question that comes up is, “How would they be paid?” Certainly not by an embedded commission in whatever product they manage to flog that day.

AE What kind of payment structure would you support?

GS As a securities lawyer I come from a profession that in effect charges for advice; it’s done on an hourly basis, and I prefer a fee-for-service basis. But having said that, I’m concerned that my profession has almost priced itself out of the market. So there has to be some curb to keep things reasonable. I don’t have an answer; all I know is that the present system is inimical to investors, and there has to be a better way.

AE Regulation is just a baseline that advisors could surpass. If you were to tell advisors, “Here’s how to act in a client’s best interest,” what would you say?

GS Your question really doesn’t have a good answer because of the way the industry operates. Advisors have to act under the supervision of the dealers, so it has to come from the dealers. The way the enforcement system usually operates is that when there’s evidence of wrongdoing, only the advisor is the subject of disciplinary action. And the dealers are not held accountable in most cases. So that would have to change. But whatever system you have, you still need oversight, and it’s hard to have effective oversight over such a diversified constituency.

AE You mentioned that in 1998 as well.

GS Did I? Who knew.

AE You said, “I’d bring all types of arrangements whereby money is managed on a collective basis, directly or indirectly, under a common regulatory structure.” Do you still think that?

GS Yes. Many other things need to accompany that, such as a fiduciary best interest standard.

AE Are you hopeful for change?

GS One can always hope. Following my initial report, a steering group was set up to see whether I was off base. And that group agreed that follow-up work needed to be done to address the problems and implement my recommendations. A work plan was developed. I’m probably the only person who still can lay their hands on that plan, and it’s still a work in process. A lot has happened, but not enough to address the original problems. One of the things that struck me years ago was at some industry function, a couple of people in their early 20s told me they were already beginning to plan for their future. I was so impressed. I think younger people are paying more attention. They seem to have more ability to question things, and to use information to make good decisions. Maybe generation Z will bring about change, because it has to come from the ground up. It’s not coming top-down, that’s for sure.

Jim Rogers, RFP, CFP, ChFC, CLU Founder of Rogers Group Financial; past chair of CAIFA (now Advocis) and the Million Dollar Round Table’s Top of the Table

Jim Rogers has always been passionate about professionalization. In the mid-1980s, he made it a requirement that all of his firm’s advisors have at least one financial planning designation from an approved list. His industry leadership has earned him many accolades, including the inaugural Career Achievement Award from Advisor’s Edge (2001). Rogers retired in 2009, but his firm, now called RGF Integrated Wealth Management, continues on.

Rogers spoke to us by phone from Vancouver, where he still writes and speaks about financial issues.

Advisor’s Edge What are your thoughts on where we are in terms of professionalization, 20 years later?

Jim Rogers Not much further along. The vast majority of folks who hold out as financial advisors, planners, or any variation thereof are regulated by product regulators. Yet if you’re a lawyer or accountant, you’re regulated by the advice you give. How do you regulate planning? A qualified financial advisor should be able to show there was a written financial plan, including recommendations, if challenged. A copy should go to the client and the advisor should have one on file and maintain it. I’d also like to see a singular regulator of people holding out as financial advisors.

AE Do you think we’ll get to that point?

JR No. With all the different regulators, there are lots of gaps. If I’m registered to sell mutual funds and I don’t like CRM2, there are lots of other financial products that don’t have the same requirement—notably insurance—and many people are licensed for both. [I can say], “I’m going to discontinue my mutual fund registration and I’m going to keep my life registration, and I’m going to sell segregated funds.”

AE Let’s move away from the regulatory baseline and talk about what it really means to be a good advisor.

JR Why wouldn’t you have an engagement letter that you give every client? This would be dated and signed by you and the client. The letter can state:

• your experience, education and designations;
• whether you provide written recommendations and periodic updates to each client;
• how often you’ll advise the client as to what he or she paid for your services, and those of your firm, in any given year.

And consider: if you hold yourself out as an independent advisor, are you really? If you make the majority of your earnings through the same financial products all the time, that’s a bit troubling. If you have an employer, a dealer and a client, you are in potential conflict. You need to identify that in your engagement letter.

As a potential consumer, say to me, “I have a product supplier, and they try and incentivize me and you need to be aware of that.” Put it in writing. “Likewise, my office requires me to do a certain volume of business to maintain my space and overhead.” That’s a potential conflict. You can also say, “There isn’t a question about what you’re paying and what I’m getting that I won’t answer honestly.”

AE Are you hopeful for the future of financial planning?

JR I am if it’s professionalized. We need regulations with some punch behind them. I somehow have to be able to go after you financially; otherwise there’s no heft in it. Also, advisors must have a fiduciary responsibility like lawyers and accountants. That’s the status they have to rise to. So yes, to the extent you professionalize yourself, that would include not just a designation but being transparent about how you get paid, in every respect. And being independent, truly. In other words, I have the broadest possible shelf, so when I prescribe a solution for financial products, I’m not biased. Do I think all of that’s going to happen? If it does, it won’t happen overnight.

AE With all the challenges facing the industry today, how do you propose bringing on new advisors?

JR I’ll cite the model we used at Rogers Group Financial, because we had the same problem. I looked at the professional services. Take an accounting firm. Kid comes out with an accounting designation, so he’s qualified. I want him to stay with the firm, so I make an investment in him. He comes in as a mentee for a senior accountant. He does workups for that senior accountant, for which he gets a salary. He might also get a bonus based upon the earnings on the files he worked on.

Applying this to advisors, eventually, he gets to know clients better, and the advisor agrees with the mentee that he will own a piece of the entire client base, or he’ll buy those clients and they’ll be his going forward. If you want to be independent, you’re going to have to make investments in people and not count on the insurance, mutual fund company or securities firm providing financing.

What we did was say, “We’re going to sell them to you, because you want to have a level of independence.” We would internally finance it. Or if they wanted to buy a book all at once, then we may co-sign their loan. Look at how the accounting and law firms do it. The moment you decided you wanted to be positioned as an advisor like those professionals, then the standards by which you’re measured, including complete transparency of compensation, changed accordingly.

Larry Bathurst, Financial planner, AVA (Quebec’s CLU equivalent) Advisor, Planex Solutions Financières

Larry Bathurst has been in the industry for 40 years and is a financial planner, financial security advisor and mutual fund broker representative. A former president of Regroupement indépendant des conseillers de l’industrie financière du Québec (RICIFQ), he started his career at Laurentian Bank and SFL before moving to Planex Solutions Financières, a firm under PEAK Financial Group.

Christine Bouthillier of Conseiller spoke to Bathurst for the Quebec perspective. This interview has been translated from its original French; go to the Conseiller website for the full interview.

Conseiller What has been the industry’s biggest change in recent years?

Larry Bathrust In the 1990s, Bill 134 came along and changed professional titles and how products were distributed. The terms “agent” and “broker” were replaced by “financial security advisor.” So the consumer can’t be sure whether they’re dealing with a captive or an independent advisor. That’s what’s happening with Bill 141, which calls advisors “representatives.” I don’t consider myself a representative; I don’t represent any particular company. But someone who works exclusively for a financial institution is a representative. We haven’t been able to clarify the professional titles. As far as distribution is concerned, my impression is that the rules are dictated by and for the financial institutions. Before the Act Respecting the Distribution of Financial Products and Services (ADFPS), which came into effect in 1998, a financial institution could not own more than 20% of a personal insurance firm. The act abolished that rule. Since then, a number of independent firms have been bought up by insurers and banks. And the consumer ends up the loser.

Conseiller What do you think of the regulatory changes that have taken place over the past 20 years?

LB While there are still problems with distribution, ethics and compliance, the changes have been positive and necessary, both for consumers and advisors. Securities regulators have taken the lead. Prohibiting sales competitions in the mutual fund industry is an example. But regulatory renewal is still slow in the personal insurance sector. For example, why are sales competitions still allowed? It’s unbelievable. They have no place in the industry. The new standards make our work more difficult. An ongoing training industry has developed, and the courses are expensive. But you’re either a professional or you’re not—having the privilege of advising clients comes with certain costs. And making ongoing professional development compulsory put an end to some dubious practices.

Conseiller Do you see automated advisors as a threat?

LB The ones that exist so far are just algorithms that analyze portfolios. They don’t really affect me, because being an advisor is much more than portfolio management, and it can’t be automated. That’s the part of the job that’s kept me in the industry. If technology allows me to spend less time on the technical side of things and do more advising, that’s good news.

Conseiller Do clients see the advisor’s role differently than they did 20 years ago?

LB [I have] two types of clients: ones I have worked with for years and new ones. The former have seen my role become more important over the years. For example, one of my clients, who is 80 years old, wants to move to be closer to her daughter. She recently called me to ask if she should buy a condo or rent one. Twenty years ago, clients didn’t think to ask us for that type of advice.

As for new clients—and especially younger ones—we have to explain our role differently than we used to. Many baby boomers experienced financial insecurity when they were young and are aware of how important it is to keep their spending in check. Younger people seem to have experienced less insecurity and are less aware of the value of money. My colleagues deal with most of the younger clients because I am at the end of my career. We need to stay in constant contact with them because their lives change quickly.

Conseiller How do you see the future of advisors?

LB The reign of the financial product peddler is coming to an end—or at least I hope [it is]. [With CRM2 disclosures,] if all the client gets is a call a year about their RRSP contributions, they’ll find they’re not getting value for their money. A professional who offers advice, on the other hand, can justify the fees they charge.

True advisors who actually advise have a bright future. In my 40 years, I’ve seen financial institutions and insurance companies disappear, get bought out, and close up shop. But over all those years, there has been one constant: financial advisors.

Cynthia Kett,CPA, CGA, CA, CFP (Fellow of FPSC), RFP, TEP Principal, Stewart & Kett

Cynthia Kett was fee-only before it was cool. Her firm, Stewart & Kett, began in 1996 and was modelled after other professional services firms. She is the longest-serving member of the Advisor’s Edge editorial board, where she has provided her unique perspective since October 2003.

Advisor’s Edge Over the last couple of decades, how has the role of the advisor evolved?

Cynthia Kett In the past, people thought of investment or insurance advisors primarily as product sales people with a narrow focus. I would say that that perception was probably true of most financial planning advisors at the time. But now they’re looking for us to provide broader perspective, analysis and interpretation, because there’s a lot of free information on the internet. Now, clients need to understand, “How do I take all this information and figure out what makes sense for me?” So they’re looking to their advisors to help them sort through the proliferation of information and figure out what’s appropriate for them.

AE What skills would you recommend for an advisor starting out to cultivate now?

CK The bar is set much higher now. It does demand a higher level of expertise and accountability. If an advisor feels that they’re lacking in some area in terms of education or skills, then they need to go out and do continuing education and seek out new sources of ideas. I’d also suggest anything to do with financial planning. The CFP program, of course, hits all of the major categories: cash management, tax planning, investment planning, retirement, risk management, estate planning. Even if people aren’t experts in all of those areas, they need to have broad-based knowledge, and be conversant.

They should also know the limitations of what they know, and either consider that those limitations are fine for what they’re doing, or upgrade their skills. In terms of soft skills, listening really becomes important now. It always was important. But it’s now more important than it ever was because, when you’re in sales mode, you tend to spend more time talking about your product and yourself. It’s more important now to really understand the client’s needs and concerns.

You also need a willingness to change, and that can be hard. One other point: the ability to care has become more important, and I often refer to that quote: “People won’t care how much you know until they know how much you care.”

AE It’s hard to legislate the ability to care.

CK I think it’s getting better. I think it’s definitely moving in the right direction, and the transparency of fees is helping.