In this time of economic uncertainty, clients are increasingly turning to financial advisors for help in setting their financial houses in order. However, advisors are struggling to meet these demands, due to a lack of comprehensive support from their firms as well as clients’ unwillingness to pay for financial plans.
That’s especially troubling because whenever an economic recession occurs, the demand for financial planning increases, says Cary List, president and CEO of the Toronto-based Financial Planning Standards Council.
“Consumers are really looking for more than simply product-based advice,” says List. “They are looking for solutions that are going to help them meet their financial needs and life goals.”
This search becomes more important as clients approach retirement — and advisors surveyed for Investment Executive‘s 2011 Report Card series say their aging clients have expressed growing interest in establishing financial plans.
“A lot of clients tend to want a detailed plan as they approach retirement, when they’re around 55,” says an advisor in Atlantic Canada with Winnipeg-based Wellington West Capital Inc. Adds an advisor in Ontario with Winnipeg-based Investors Group Inc. : “Half of my clients are over 50, and they look at their financial plans closely.”
As a result, the advisors surveyed for this year’s Report Card series have stepped up their efforts to meet their clients’ needs. In fact, the percentage of advisors who say they do financial plans for clients is up to 79.7% this year from 74.2% in 2010. However, the percentage of clients with a financial plan grew at a much slower pace, reaching 49.6% this year, up from 48.7% in 2010 — apparently a result of lack of firms’ support.
One survey finding that highlights the issue of firm support is the growing gap between the overall performance and importance average ratings across all channels in the “firm’s support for developing a financial plan for clients” category. The average performance rating was 7.7 overall vs an importance average of 8.5 overall. This gap of 0.8 of a point is double last year’s gap, indicating increasing expectations and dissatisfaction among advisors.
Advisors’ complaints about their firms’ support for financial planning range from inefficient software to lack of internal training and access to experts to unsatisfactory compensation for doing financial plans. In particular, advisors across the board expressed much disdain for their financial planning software, citing lack of comprehensiveness and flexibility to meet their clients’ needs.
“The tools we use in-house are very basic,” says an advisor in Ontario with Montreal-based National Bank of Canada. “We need something more comprehensive.”
Adopting new financial planning software is certainly a challenge for many firms. However, changing the compensation structures to encourage financial planning may require more of an effort.
“Financial planning is not cost-effective,” says an advisor in Atlantic Canada with London, Ont.-based Freedom 55 Financial. “We’re just not set up that way.”
In fact, the financial services industry lacks a business model in which compensation is tied to financial planning and the quality of a financial plan, List says, noting that “most business models are based purely on assets or sales.” As a result, he points out, the prevalent notion among clients is that financial planners can get paid by commissions from the sale of products — and the industry has perpetuated this false impression.
Indeed, many firms do not charge a fee for a financial plan, including Investors Group and Toronto-based Royal Bank of Canada. Both firms see financial planning as the way they do business, not as a service.
Such practices make it much more difficult for advisors and firms that charge a fee for developing a financial plan, says List: “There’s tremendous value to the planning advice financial planners give, and clients need to be made aware that it’s not free.” IE