With new fee disclosure rules, a possible ban on embedded commissions and an increase in robo-advisor usage, the financial industry is undergoing massive change. What exactly the future holds is still up for debate, but one thing is certain: The advice industry is going to look very different.
On Feb. 22, at Morningstar's Executive Forum in Toronto, four leading industry players discussed the future of advice. All agreed that one of the more dramatic changes occurring in the industry concerns embedded commissions and deferred sales charges (DSC). The CSA launched a consultation paper in January contemplating a ban on commissions, saying embedded fees incentivize dealers to sell funds that come with higher costs.
The call to ban commissions is controversial, but Peter Intraligi, president and chief operating officer of Invesco Canada, agrees that changes need to be made. "The status quo is not the solution," he said. Rather than eliminating embedded compensation, though, he'd like to see a 1% cap on trailing commissions for equity funds and 50 basis points on fixed-income offerings.
Intraligi also thinks commissions on DSC options should be uniform across all funds, whether that's 5% or another number. "If you have the same compensation structure, then that eliminates the potential conflict that exists of recommending one product over another," he says. If advisors feel they should be paid more, he adds, they can use a fee-based model to increase their compensation.
However, Neil Gross, president of Component Strategies Consulting, a firm that offers strategic consulting on capital markets-related public policy issues, says any embedded fee presents a conflict of interest, even if it's streamlined. If an advisor has a choice between a fund with no trailing commission and a fund with one, they'll choose the fund that pays them more, he says. This can hurt clients, as research shows that funds that pay trailer commissions perform more poorly over time.
"The very existence of trailing commission creates problems in the market, where you have funds that attract the inflows of capital on the basis of paying a trailer commission rather than on the basis of performance," Gross says.
Having only no-fee products may help eliminate conflicts, but it may also alter the advice-giving landscape, said Martin Lavigne, president of National Bank Financial. In Australia and the United Kingdom, where embedded fees have been banned, advisors have begun moving up-market because they're not being paid enough to serve less affluent clients. That's one of Lavigne's biggest worries: that advisors will stop helping those who can't afford fee-based advice. "The mass market is being left unadvised in certain countries," he said.
It's too early to tell whether this will happen in Canada, said Andrew Kriegler, president and CEO of the Investment Industry Regulatory Organization of Canada (IIROC), but it assumes that Canadians won't be willing to pay for advice. "That's a paternalistic assumption, that people can't make the best decisions for themselves," he said. "It may be true, but we should put that assumption under a harsh light before we sign up for it."
It also assumes that the only option for Canadians is traditional financial advice, when there may be alternatives such as robo-advisors. While many people in the financial industry are concerned about how this technology will impact their business, Lavigne sees robo-advisors not as a threat, but as an enabler. "If they feel like getting advice on a Sunday night, then technology should enable us to deliver that advice when and where they want it," he says.
Technology will also allow advisors to understand their clients in a deeper way, said Lavigne. Advisors and clients currently speak for an hour once or twice a year, but advisors can learn much more about a client through social media, better data collection or regular contact via a robo-advisor. "That understanding will be greatly deepened," he says.
Kriegler agrees that robo-advisors will improve service, but it's not yet clear how. Today, many investors prefer to go the do-it-yourself route. Software will let clients have as much, or as little, contact as they want with their advisor. "The rise of technology is going to support the ability of people to choose where in the spectrum they'd like to be," he said.
This does pose a challenge for regulators, which operate in a more binary way, said Kriegler. The industry consists of full-service shops and discount brokerages, but not much in between. The regulatory community has to catch up and recognize that they're no longer living in that kind of world, he says.
Technology may also help resolve the debate around the kind of value advisors provide to clients, a frequently discussed topic since CRM2 disclosure rules were issued. Intraligi likens it to classroom technology. Now that kids can quickly access books, notes and activities on an iPad, the teacher has more time to teach. "It hasn't replaced the need for an educator," he says. "What it has done is give teachers more time to focus on value-added activities in the class."
There's no reason why robots can't handle nearly every step of planning, even providing holistic plans, says Gross, since robots already perform surgeries and fly planes -- but they can't be trustworthy and professional. "We're not going to be able to compete with the robots' ability to be consistent," he says. "The potential for the human advisor is to inspire absolute trustworthiness."
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