Download The new regulatory regime is upon us, but the industry can be

Redrawing
the Lines
The new regulatory regime is upon us, but the
industry can be preserved with more advisor
input. Deanne Gage reports findings from the
annual Advocis Regulatory Symposium
18 FORUM JANUARY / FEBRUARY 2017
PHOTOGRAPHY BY RICK CHARD
I
t’s rare to attend a regulatory conference where all speakers display such
candour front and centre. Perhaps it showed a turning point of how the
industry needs to evolve, one that has buy in from all affected parties.
Advocis president and CEO Greg Pollock set the tone for the day with
his opening remarks. He unequivocally supports the industry being held to
a professional standard, but not one that’s imposed by regulators without
advisor consultation and input.
He also spoke about the “turning back the hands of time” by the regulators positioning advisors as just people who sell product instead of professionals who have
trusted relationships with their clients.
The regulators didn’t mince words, either. As David Linder, executive director at
the Alberta Securities Commission, put it, regulation is not a popularity contest. “We
are not looking to get re-elected. Yes, you have input and we do need your comments
because we need to understand.” But he said, the fact remains that embedded compensation, for instance, provides inherent conflicts of interest. They found fund managers’ top priority “was not providing higher performance in [a client’s] portfolio.”
But does banning commissions truly achieve this objective? What’s the solution
when you have an industry that feels one way and regulators that feel another way?
JANUARY / FEBRUARY 2017 FORUM 19
SYMPOSIUM
Debra Foubert,
director, compliance
and registrant
regulation,
Ontario Securities
Commission
John Wilkinson, a former Ontario cabinet minister who’s currently president and CEO at
Wilkinson Insight Inc., explained that the industry has two choices: be regulated by the government or convince the government that the industry can regulate on its own. Advisors need to
remember that it’s not the regulators’ role to cater
to the industry; they exist to protect consumers.
“If the industry doesn’t do it, the regulators must,”
he told delegates. Wilkinson has the unique perspective of someone who worked in the industry
and served in government.
The challenge with the financial services
industry is all the different platforms have different ideas, and they have yet to come together
unanimously. And it’s not just about engaging
people in the industry; clients and investors need
John Wilkinson,
to brought onside, too, Wilkinson noted. Investors
president and
need to play a role in the fight toward self-reguCEO, Wilkinson
Insight Inc.
lation. (Read more about Advocis’s new investor
initiative in Wade Baldwin’s Final Word column
on page 27.)
What are the consequences of losing your
financial advisor? Say your advisor can no longer
afford to keep smaller client accounts or the client
cannot afford to pay fees when embedded commissions are banned. The Symposium’s CEO
panel had some interesting numbers. Let’s say
someone lost his advisor from 2010 to 2014.
According to Stefan Kristjanson, president and
COO Canada at Great-West Lifeco Inc., their
assets would have dropped by 34 per cent. For a
client who stayed with her advisor during the
same period, her assets would have gained 26 per
cent. It’s a simplistic example, but shows at a fundamental level the impact professional advice can
have on a person’s financial well-being. So now, there’s a pressure
[advisors’] lunch.” Instead, they are for those investors who desire
test for advisors to show their value, Kristjanson said.
some feedback, but not on a full-service basis.
Earlier this month, clients may have experienced quarterly
Having said that, he believes that younger generations are lookstatement shock when they saw more costs of investments dising to explore alternatives to their parents’ advisors, something
played. “Consumers remember advisors talking about compenunheard of previously. Generation Xers and Millennials make up
sation, but they don’t truthfully understand the language and
87 per cent of Wealthsimple’s client base, and the average account
terms, so I think there will be some surprises,” said Rick Annaert,
is around $50,000. Nugent noted that most people sign up for the
president and CEO at Manulife Securities Investment Services
service through the company’s app instead of its website. He thinks
Inc. “It’s one thing to say I get paid one per cent, but another to
it speaks to a younger generation’s relationship with their smartactually see a dollar value attached.”
phones, and how, for instance, Millennials don’t answer their
On the other hand, Kevin Dougherty, president of Sun Life
phones, but answer texts immediately. “Millennials are impatient
Financial Canada, thinks the best advisors have been educating
and want instant gratification, and they want to sign up at any
their clients and don’t look at CRM2 as a threat in any way.
time of day or night,” he said.
Besides CRM2, robo-advice is also somewhat seen as a threat
Renowned United Kingdom advisor Bhupinder Anand spoke
to advice. Often the service is positioned as a way to replace a faceabout how regulation’s well-intentioned stance against commisto-face advisor, when nothing could be further from the truth,
sions has changed the face of financial advice in his country —
said David Nugent, portfolio manager and chief compliance officer
and not for the better. While in 1986, there were 300,000 advisors
at Wealthsimple, an online investment manager. He sees roboserving all markets — from clients with little to invest to the high
advice as being squarely in between a full-service advisor and a
net worth — today, just 22,000 advisors remain, and that
client who does their own investing. “We do say if you need a lot
includes those who are non-practising. He believes part of the
of advice, you have to get it,” he said. “We are not here to take
problem stems from not understanding how things work with
20 FORUM JANUARY / FEBRUARY 2017
David Linder,
executive director,
Alberta Securities
Commission
David Nugent,
portfolio manager
and CCO,
Wealthsimple
professional advisors. He noted a 2013 survey about the UK’s
Retail Distribution Review. People were asked, “Would you be
willing to pay a fee for advice?” The answer was an overwhelming
“yes.” “But they failed to ask ‘how much would you pay?’” said
Anand, managing director at Anand Associates. “Any survey is
only as good as the questions you ask.”
For advisors to stay in business in a highly regulated environment, he suggests that they up their qualifications, keep good
records, and be clear about their process with clients. In his own
practice, his value proposition is communicated regularly. The
discussion is less about what he gets paid, and more about what
value he creates for clients. Anand defined value as “doing something for clients that they cannot or will not do for themselves.”
Prospects know a first meeting with Anand is “at his expense” —
not complimentary. He calls himself a financial architect, and
like a typical contractor, there’s a menu of services he provides
and there are fees directly attached to them. Clients can tick the
services of interest to them and directly see the bottom line and
value.
Some investors and regulators may believe embedding commissions will mean the price of advice will decrease, but in reality,
Bhupinder Anand,
managing director,
Anand Associates
the opposite occurs, said speaker Pierre Lortie, senior business
advisor at Dentons Canada LLP in Montreal. Lortie wrote a report
about the effects of unbundling fees on the financial advice
market.
Instead, the mass market, those who arguably need professional advice the most, will no longer be able to afford the advice.
In the U.K. and Australia, for example, the fee for advice is
much higher when embedded commissions are eliminated. To
keep their bottom lines afloat, banks and other financial institutions start setting account minimums to have access to professional
advice. Generally, it’s about $150,000, and unfortunately the
majority of Canadians don’t meet that requirement. Lortie noted
that about 80 per cent of Canadians have under $100,000 in
investable assets.
However, Australian regulators did seem to learn the causeand-effect lesson concerning insurance. Lortie said regulators
decided not to ban commissions on life insurance. In this case,
they felt charging an upfront fee would affect the overall insurance
sales and it would be not good social policy to have so many citizens
uninsured or under-insured.
In Canada, the insurance industry is on the cusp of upheaval.
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SYMPOSIUM
Ontario’s Minister of Finance Charles Sousa recently announced
legislation for the Financial Services Regulatory Authority (FSRA),
which will merge with the Deposit Insurance Corporate of
Ontario. “We made a recommendation that FCSO in its current
form should be replaced by an integrated body that would exercise
a twin peaks approach to regulation,” said Lawrence Ritchie, partner at Osler Hoskin and Harcourt LLP, who was also a member
of the Ontario Securities Commission expert panel. He said the
new FSRA will be self-funded, authorized to make and enforce
rules, and “will be guided by a mandate set out to a statute of which
it should be held accountable.”
On the product side, segregated funds and universal life will
likely experience CRM2-like expectations where clients learn the
commissions paid to advisors, noted insurance panel moderator
Jim Ruta. As for commission disclosure on life insurance, that’s
not as inevitable. “But both are important to talk about so the
advisor can be prepared for the long haul,” he said.
Jim Virtue, president and CEO at PPI Solutions Inc. and vicechair for the Advocis National Board of Directors, believes it’s a
good thing for the insurance industry to be proactive. “[The
thought was CRM2] needs to apply to segregated funds, too,” he
said. “I applaud what the insurance companies are doing because
they are improving the disclosure. CRM2 really just focuses on
distribution costs, and that’s a mistake, it should really focus on
all costs. In the case of segregated funds, the life insurance industry
is planning on having better disclosure than CRM2.”
He hopes the regulators take the time to understand that insurance advisors are not the same as investment advisors. “There’s a
different skill set with selling life insurance, and it needs to be
looked at differently,” he noted.
Virtue believes what’s needed is a self-regulatory organization
led directly by the industry in consultation with advisors, regulators, investment companies, insurance companies, and politicians. He cited Advocis as taking the lead by putting forth its
Professions Model five years ago. “We did it because we recognize
that anybody can call themselves a financial advisor. That is
wrong, there needs to be qualified professionals,” he said. “There’s
no process for advisors to keep their knowledge current. There’s
no effective industry-wide disciplinary process, and the current
legislation focuses on regulating the sales side, not that of a trusted
relationship.
“We need to have proficiency standards, CE requirements, a
code of professional conduct, a registry of advisors, and a true set
of governance discipline and enforcement. Membership in this
body should be a condition of licensing.”
He also said the industry needs to get behind one or a series of
designations, but grandfather veteran advisors who have practised
for decades and have trusted relationships.
For all of this to occur, it will require active lobbying and participation from the industry, a movement really. In early January,
the Canadian Securties Administrators released a consultation
paper advocating for a direct-pay model, where investors directly
pay the dealer for product choices.
If the industry can truly redraw the lines to reflect all stakeholders, the future is ripe for professional financial advice. 
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