What happens when advice breaks up with investments

Financial services are transforming. Thanks to the rise of cheap online advice, consumers who still work with human advisors are demanding lower fees, comprehensive advice and good performance—erasing any doubt that advisors can simply place investments. And with a statutory best interest standard not yet dead, advisors might perceive robust financial planning as a way to protect against liability, suggests the “U.S. Advisor Metrics 2017” report from Cerulli Associates.

As advice forges ahead beyond investments, advisors’ services and business models must evolve. Here’s a look at where we are and where we’re going.

Advice: You know it when you see it?

To start, what is advice? That can be difficult to assess, regardless of whether it originates from humans or tech.

For example, securities litigator Gillian Dingle notes that estate planning isn’t IIROC-regulated (beyond decisions involving investments). “IIROC would not dictate having a discussion about a client’s will,” she says.

Yet financial planning bodies such as the Canadian Securities Institute (for the PFP), Financial Planning Standards Council (for the CFP) and the Institute for Advanced Financial Education include estate planning as an expected competency.

The guiding regulatory priority for defining advice is investor protection, says Cristie Ford, associate professor and director of the Centre for Business Law at UBC’s Peter A. Allard School of Law in Vancouver. That’s clear in the regulatory duties required by client-facing advisors and online platforms, both of which are regulated the same way in Canada.

“There are ongoing challenges to regulators in seeing new developments as they emerge and understanding the potential they have to undermine the existing regulatory structure,” says Ford.

As advice evolves, she suggests regulators “continue to review and potentially revise the existing regulatory structure in light of the underlying priority around investor protection.” That means, for example, not assuming algorithm-based platforms operate as humans do. In the U.S., regulators have responded to that issue by not requiring standalones to operate as fiduciaries.

Frank Allen, executive director at FAIR Canada in Toronto, says balanced investor protection is important regardless of innovation in the sector. “While innovation can be desirable and achieve various objectives, in and of itself it’s not necessarily responsive to investor protection,” he says.

He says balanced investor protection includes the disclosure of the nature and cost of services and who they’re suited for, “rather than a buyer-beware marketplace,” he says.

Spotlight on financial planning and KYC

Jason Pereira, partner and senior financial consultant at Woodgate Financial & IPC Securities Corp. in Toronto, embraces the move to comprehensive advice. At a U.S. conference he attended last year, advisors under 40 discussed ways to move the industry from product sales to advice while covering the potential advice gap. Pereira wants that conversation to develop as deeply north of the border. (He suggests the Canadian discussion is impeded by a lack of independent advisors.)

Indeed, research shows that younger U.S. advisors adopt financial planning services at a higher rate than their older counterparts. On average, they offer 5.1 planning services compared to 4.6 for older advisors, the Cerulli report reveals. Further, younger advisors provide planning services to more clients (82.5% of clients, compared to two-thirds of clients for gen X and baby boomer advisors). And while only 38% of boomer advisors charge for planning, 62% of younger advisors do.

The report also finds that more advisors are offering “comprehensive ongoing planning advice”: in 2013, about one-third of advisors offered financial planning; in 2017, that figure rose to about half.

The shift away from direct investment toward advice isn’t new, says Pereira, referring to the popularity of mutual funds as outsourced investments. Rather, the longer-term trend is picking up steam, he says.

And, beyond being a forced response to externalities, the shift makes sense, he says. “Show me a single academic study that any advisor anywhere has been able to be an effective stockpicker.”

But as advice cuts investments loose, it’ll have to bring its A game.

Rod Burylo, business development manager for Western Canada at Croft Financial Group in Calgary, says advisors who refer clients to firms with cheaper model portfolios, or to online platforms with relatively cheaper actively managed accounts, are seen as offering a superior investment service at a better price.

Superior service, in certain circles, has historically been a low bar.

Financial advice has too often been provided by specialists, such as mortgage and insurance brokers, and mutual fund salespeople, says Ron Fox, CEO at Glidepath Portfolio Services in Toronto. That leaves clients with transactional information divorced from holistic financial planning. In contrast, he says, a financial planner is a generalist, who can assess financial health and then refer out as required, while being accountable to the client for the overall plan (though financial planners can also specialize). Further, a deep dive into KYC lays critical groundwork for portfolio management, he says.

The role of advice—specifically financial planning—will more clearly emerge if embedded commissions are banned, says Fox. Similarly, the Cerulli report says planning is “harder to articulate when clients perceive only an investment management fee.” Clients are more likely to take the planning process seriously “when they see a tangible dollar amount attached to it,” says the report.

Ultimately, Fox, who himself holds a CFP designation, foresees an industry focused on financial planning delivered by a CFP, along with outsourced portfolio management. (Some would prefer the industry focus on whether advisors are independent or not, rather than whether they’re CFP-designated. See “Advisors play the name game”.)

Referring out investments is changing advice—and relationships.

“The advisor’s relationship with investment managers will look like the advisor’s current relationship with lawyers and accountants,” says Burylo.

He sees creating broader, cheaper access to portfolio management as ethical, because in a volatile market, for example, discretionary portfolio managers efficiently make decisions for clients, instead of clients being placed in a to-call queue.

And moving to advice-only means advisors no longer have to be securities-registered, freeing them from the associated compliance obligations, including continuing education requirements beyond those for any designations, Burylo adds. That means MFDA reps, for example, could give up their registration, and refer higher-net-worth clients to portfolio managers and lower-net-worth clients to online platforms. With new business models, “a non-registrant can refer business to a wealth manager and get paid,” he says.

Advice outgrows regulation

But a focus on advice could leave regulatory gaps. For example, Pereira notes cases where clients have been put into fee-based accounts unnecessarily—a problem highlighted last year in IIROC guidance—or where advisors receive management fees from online investment counselling services, yet offer no client services.

“Advice is not regulated, and that’s a problem,” he says. “What is the advisor providing for this fee if they’re not handling asset management? They should be providing financial planning advice. But there’s no audit mechanism for that yet.”

Allen is also concerned about a lack of regulation. “To the extent people are relying on financial advice, as opposed to investment advice, we think there’s a regulatory lacuna,” he says.

He welcomes Ontario’s forthcoming regulation of financial planners. As it stands, “With no overarching framework, you have extreme variation in skill sets, backgrounds, titles and who advisors are accountable to,” he says.

But he notes that organizations like the FPSC, which oversees the CFP designation, currently have no formal regulatory status. “To be part of the FPSC is voluntary,” he says.

Burylo says that, since professionals like CFPs and those with other designations have prescribed processes based on principles-based oversight, advice would likely be assessed based on what a reasonable advisor would do. Avoiding a box-checking exercise would be a key concern, he says.

Box-checking is nearly impossible based on the expectations laid out in the Canadian Securities Institute’s PFP competency profile, the FPSC’s Financial Planning Body of Knowledge and the IAFE’s practice guidelines for financial advisors. All three documents lay out broad requirements that span hundreds of subtopics as diverse as economics, tax and psychological disorders related to money.

Such evidence of breadth and depth shows the importance of advice and, perhaps, the importance of its professional designation, for which a greater regulatory role could potentially emerge.

Go hard with changes, but keep a soft touch

As advice evolves, so too will business models. Burylo suggests advisors find creative ways to harness tech to deliver services clients are willing to pay for. “Don’t necessarily think the business model should be what your boss is telling you it should be. Be prepared to question,” he says.

In the U.S., unique business models include group financial counselling with monthly membership fees—“like a gym,” says Pereira. For advisors who want to go fee-only or independent, there are planning networks that offer turnkey business solutions that allow them to serve younger clients.

Dingle says advisors can differentiate their services by proactively delivering on suitability requirements as clients’ circumstances change—for example, as clients buy homes, have children or get divorced, which are things tech alone can’t yet address.

Advisors can provide plenty of such examples from working in the trenches.

For example, Jillian Bryan, vice-president, portfolio manager and investment advisor at TD Wealth in Vancouver, describes discovering critical insurance coverage that a client on disability never knew about, and promising to drive a frail client to see a lawyer to rewrite a will.

Perhaps notably, the advice she gave in each case was based on knowledge that could only have been obtained by in-person meetings. As they sat across from one another, Bryan asked the first client about the pay stub she was holding, which held the insurance information. And the second client’s declining physical ability was likewise observed firsthand.

Allen says face-to-face meetings may help promote investor understanding of services and risks, and Fox notes the physiological benefits that result from human contact.

Ultimately, the relative importance of investments versus advice must be weighed. Says Pereira: “We have tissue boxes in our meeting[s]. Not because of investment returns but because of what happens in clients’ lives.”

Advisors play the name game

When it comes to names for advisors, it’s the Wild West, says Jason Pereira, partner and senior financial consultant at Woodgate Financial & IPC Securities Corp. in Toronto. He says he’s seen everything from “supertrader” (proposed but rejected by a compliance department) to “financial consigliere” (in a LinkedIn profile). He calls himself a “financial consultant” because “what we do is more consultative day-to-day than anything else.”

A lack of connection between names and services is particularly concerning.

“It’s a daunting exercise to try to understand the titles that people are using and what that connotes,” says Frank Allen, executive director at FAIR Canada in Toronto.

“There can be wide variation in proficiency, all the way from a CPA to someone who is merely calling himself or herself a financial planner.”

Adds Cristie Ford, associate professor and director of the Centre for Business Law at UBC’s Peter A. Allard School in Vancouver: “There’s an ongoing concern that people don’t understand who’s giving them advice and what incentives those people have.”

For example, Allen says titles should explicitly make clear when someone is a salesperson.

That viewpoint motivated Quebec’s Professional Association of Financial Services Advisors (PAFSA) to propose a designation for independent advisors: Certified Financial Services Advisor.

Michael Luciani, vice-president of PAFSA, says the title would help consumers distinguish between “what an independent advisor can provide as financial service” compared to salespeople at banks, for example.

Financial planner is already a regulated title in Quebec, but Luciani says consumers continue to be misled on fees, since most financial planners also sell products—perhaps exclusively if they aren’t independents. (Further regulation of Quebec’s financial sector is underway with Bill 141, tabled in October 2017.)

Despite that problem, Ontario’s move to regulate financial planning titles has received wide support. Pereira says he’ll change his title to financial planner once it’s regulated.

“Unless you’re doing written financial plans—and you’re in the tiny minority of us who actually do—you should not have that title,” he says. “It’s very deceiving.”

But, he adds, because the industry consists of many types of advisors with different business and pricing models, further title regulation is required. He also notes there’s no standardization of compensation terms, such as fee-based versus fee-only, which also confuses clients.

Ideally, says Allen, there would be “a small, finite number” of titles that would allow investors to “readily ascertain what professional scholarship, training, education or experience is behind each.” In Consultation Paper 33-404, CSA proposes three different ways to label advisors, which result in four or two titles, depending on which way is chosen. However, most of the names don’t roll off the tongue.

For now, the refrain of “buyer beware” remains.

That means clients should interview more than one advisor, says Pereira. And at those interviews, clients should ask advisors to demonstrate their worth—for example, by presenting case studies. Advisors should put their services in writing “and put the fees in writing at the same time,” he says.