Let’s continue last month’s discussion: “Feeling Ripped Off?”
From bank tellers pushing unwanted products to financial advisors charging huge hidden fees for their “expertise” in managing your money, the financial business in Canada is broken.
I introduce you to today’s financial business in THE END OF WORK:
“There are many financial planners and advisors who are knowledgeable and dedicated and really do care about their clients. Unfortunately, there are more who are not. There are some 90,000 people in the financial business across Canada. Most are paid on commission. They have to be pushy, and sell you whatever they can. It is a tough business in which to make a living, resulting in high turnover. Some financial companies recruit anyone with a pulse, sell them the “opportunity” to get rich, teach them some sales pitches, and let them loose on you. Many have little financial background, but they have bought into the company sales pitch and can make their product sound “soooo” good. You may have already met one of these. There is no regulation of the term “financial advisor” or its variations. Anyone can hang out their shingle as a financial planner, once they meet the basic licensing requirements to actually sell financial products.”
There is likely another 100,000 or so sales people who work for the big banks and all the credit unions et cetera. Even those paid on salary still have quotas to meet. Despite the reputation of their employer and an impressive title, most have limited financial training and are simply salespeople pushing product.
The myriad of financial industry regulators have been pursuing the transparency approach to fix the finance business. More regulation forces more disclosure and even fiduciary duty obligations on advisors. My criticism of this approach is:
“In the interest of consumer protection and disclosure, the U.K. and Australia have banned embedded compensation and have imposed a statutory fiduciary duty obligation. Similar regulatory changes are now being proposed in the U.S. and Canada. CRM2 rules, effective July 1st (2016), and just being seen by many clients in their year-end statements, do require more disclosure from financial advisers. The satire shows are already spoofing poor clients trying to make sense of this new information. On the down side, under such regulations in the U.K., some 25% of advisors left the business due to the costs of compliance, including all the paperwork to prove fiduciary duty. That cost forces the rest to focus on higher net worth clients, where more revenue on larger sales can compensate for the added cost of regulatory compliance. That can leave the rest of us relying on Google for our financial advice.”
Many products have been sold for many years on a commission basis, from cars and travel to insurance and investments. It is a business model that can work for both consumers and producers. The problem arises when one party has an advantage in information and knowledge. Financial products are complex and the seller has the advantage, to the point that too many consumers are left to rely on “trusting” the financial planner and what he is selling. That is where the majority of the licensed salesmen and bank employees make their living, by taking advantage of that trust. I saw this in a recent client review where they had recently signed up for a big bank mutual fund as an RRSP. There was not really anything “wrong” with this purchase, it was just, in my view, inappropriate. The mutual fund fee was too high, the deposit amount was not enough to make a difference, and at her tax bracket there was little advantage in registering the account. The commission model is popular with many consumers because they do not have to pay separately for the financial advice.
The solution that I have been advocating is the importance of “Financial Literacy”, to educate yourself to be a more knowledgeable purchaser of the financial products you need for a secure present and future. You can (somewhat) level the playing field.
Financial services are really two products. One is financial planning and advice in setting your goals and priorities. The other is choosing the financial products that are going to provide you with the greatest value in pursuing your goals and the management of your money to ensure it continues to serve your evolving goals. The problem is in getting both planning advice and product selection from the same source. When the product purchase advice is what pays the advisor, how can you be certain the financial planning advice, leading to the purchase, is really in your best interest? You can’t. The only assurance that your interests are considered first is when you are paying the piper.
In addition to improving your financial literacy, you have another alternative. More financial planners are providing services by the hour, just like a lawyer or accountant, to address your needs and goals. You can have the choice to pay the piper yourself by hiring a by-the-hour financial planner*. With that plan in hand, you can then go buy the products you need, often online, sometimes with a robo-advisor to manage your portfolio, using very low fee ETF investment funds. Or you can even use a financial product salesman, but where you give clear directions and control the transaction.
* Some planners claim to be “fee only” but the fee is as an annual percentage of your portfolio (and likely additional fees for every service). That is little different than a commission salesman (or a bank).