Opinion: How to reform a rotting banking advice system

Advisors charge too much and deliver too little.

That’s what Canadian investors are being told — with greater volume and frequency —by the media and our robo-advisor competitors. If you believe the hype, we’re a poorly regulated group of aggressive salespeople who can be bought off, with gifts, to push certain products.

The response, historically, has been to clamp down with regulation, which has brought us CRM2 and a potential embedded fee ban. With all the change coming, I predict there will be fewer advisors and wholesalers in the next three years.

For those of us who work hard for our clients and want to elevate our profession, I see this as good news.

Read: CARP fee poll hits a nerve with advisors

And yet.

While our industry is cleaning up its act, it takes the CBC to discover that our friendly neighbourhood bank branches may not be as friendly as many Canadians took them for. Workers at some of the big banks – including branch advisors — have claimed they were pushed to deliver on aggressive sales targets under threat of job loss.

After working for more than 20 years in wealth management at several bank-owned firms, and having sat through scores of retail bank branch sales meetings, I can tell you bankers have sales targets that would make the average Honda salesperson cry. They regularly talk about “SR” (sales revenue) and gathering as much “share of wallet” as possible.

The bankers and branch-based advisors are not to blame. In general, they sincerely want to help. Rather, it seems it’s the system that’s incenting them to push. Nor can we wholly blame senior management who, in my experience, have no idea that aggressive tactics are used.

I blame the regulators.

For example, why is it only now that we’re thinking of banning embedded commissions for discount brokers? The banks have been selling no-load funds with full trailer fees through their online trading platforms for decades, collecting fees for advice when the funds were intended for DIYers.

How has this been allowed for so long? Most investors who buy mutual funds from their discount brokers and bankers have no idea that they are paying the same rate as they would from a full-service advisor. They’re getting the products and the sales pitch, but likely no objective advice.

It seems that aggressive sales tactics have extended to retail lending. Our politicians want to blame speculators and foreign investors for housing unaffordability, but the real causes are demographics (millennials are of prime house-buying age) and cheap, plentiful money. If you haven’t been offered a higher limit on your HELOC, a new credit card or overdraft protection lately, then your cell phone is off.

Read: Is housing exposure a risk for portfolios?

You could liken entering a bank branch today to attending a timeshare presentation: lovely visions of a wonderful future, such as a beautiful home or splendid retirement, but little discussion about how to pay for it. Where are the KYC rules as they pertain to lending products? Where are the “credit tolerance” questionnaires? Why is there no talk of a best interest standard for bankers?

The solution

To really serve Canadians, we owe it to them to at least appear coordinated in our efforts to regulate the products and services they receive. How can we have financial advisors being held to ever-higher standards of transparency and professionalism while our bankers run around the park off leash?

I’d argue that banking clients need and expect a higher degree of protection than a wealthier investor who has chosen to work with an advisor.

What can we do?

I propose we go back to the future. Our financial system used to have four pillars: chartered banks, insurance companies, trust companies and brokerages. Deregulation began in the 1980s and now almost all banks and insurance companies offer banking products, insurance and investments through both independent and captive sales forces.

After the global financial crisis, U.S. banks were forced to separate their proprietary trading from their banking operations. We should do the same with our banking and retail investment businesses here.

Banks should offer deposit products for retail clients, and discretionary portfolio management via their trust operations to wealthy clients. They should not be in the fund manufacturing business.

And, while I know this is extreme, I think banks should be out of the investment advice business. They can keep their discount brokers as long as everything is offered without advice. But banks should be required to divest their full-service operations so that advice can go back to being truly independent.

Read: Battle over CSA reforms reveals industry cracks

With respect to lending, there need to be suitability rules for any credit product. Banks use ratios to assess their own risk, but what is in place to ensure Canadians are not being sold more credit than they can safely use? There should be limits for low-, medium- and high-risk debt amounts, and products should also be labelled accordingly. For example, RRSP loans could be considered low-risk debt products, while HELOCs for investment purposes should be limited only to knowledgeable, experienced borrowers.

Indeed, it seems the credit world is upside down: if you have low risk capacity and not a lot of money, then I cannot sell you a high-risk investment. Yet the same person, as a borrower, could only access the most punishing credit products. For instance, if you can only afford to borrow $300, then you’re paying loansharking rates from a payday loans company. In B.C., there’s now a maximum APR of 443.21% on a two-week loan (it used to be almost 600% APR). That should be illegal.

I hold little hope that any of the reforms I’ve suggested will actually happen – just as I hold little hope that our regulators can actually help investors. I’ll believe they can when I see higher minimum entry requirements for advisors.

Trust and confidence: our entire financial system is based on it, but something down deep is broken and rotting.

Agree? Disagree? Comment below or email us.

Harper Fraze is a pseudonym for an investment advisor with a large Canadian-based financial services firm. As with all columnists, his views do not necessarily reflect those of Advisor.ca.