What choice do we have when choice itself is engineered?

To begin with, no advisor can offer clients the entire universe of investment products. Advisors must work within the confines of what they’re licensed to sell and the limits of the product shelf authorized by their firms. Moreover, within those boundaries, advisors can recommend only the subset of investments they’ve studied closely enough to comply with the know-your-product rule.

Next, add a pinch of reality. Like everyone else, an advisor’s time is limited and they have to earn a living. So it’s to be expected that their time and attention will skew naturally toward products offering higher, rather than lower, commissions and fees. As the recent Brondesbury report confirms, it’s no big surprise that incentives affect advisor behaviour.

And that’s where investment choice meets the forced card: clients who rely on their advisors really get to choose only from among the things their advisors want them to buy.

It’s important to understand this dynamic when thinking about how investors’ needs should be met. It’s especially important to keep it in mind when “more choice” is presented as the way to fulfill those needs.

More isn’t always better. Behavioural studies note that adding investment options may simply paralyze decision-making. In any event, more is better only if it actually translates into a new and broader range of alternatives that benefit the chooser. But in a world where rules and realities limit investors’ choices – and particularly where those choices get shaped to the contours of advisors’ interests – we need something more than just more choices in order to make things better.

We also need a clearer understanding of the interplay between choice and risk tolerance, especially now that low-risk investments yield zero returns or even net negative ones. In this environment, for many Canadians, investing is like walking the plank – they find themselves having to accept risks of losses they can’t withstand just to avoid incurring the erosion that inflation will surely inflict if they stay true to their risk-averse nature. This is more risk compulsion than risk tolerance. There’s little free will involved.

And it’s no picnic for advisors, either. Without viable low-risk options to offer clients who have little or no loss capacity, advisors themselves face a Hobson’s choice. They can’t rightly say there’s no alternative to risk-taking because there’s always the option of scaling back financial objectives. Clients can be told they’ll have to live more frugally, work longer than they planned, and accept a more meagre retirement. But who wants to deliver this grim message? Who can afford to be that frank, when their competitors can lure away all those clients with the simple assurance: “I can get you to your goal, but you’re going to have to take a bit of risk.”

So, what’s the answer? How do we ensure that investors get to make better choices, without penalizing good advisors? How do we fix the investment choice process?

For starters, we’ve got to recognize that the process goes awry because factors other than what’s best for the client are allowed to govern choice.

For example, we regulate advisors based on what they sell (specific investment products) rather than on what they do (provide investment advice). This compartmentalizes advisors and tends to funnel the advice they give along product-specific lines – regardless of whether that serves, or in fact harms, investors’ interests.

We also allow an advisor’s range of product offerings to be determined without any requirement that it meet a spectrum of client needs while, at the same time, we impose no obligation on advisors to ensure those needs get met through appropriate referrals of clients elsewhere. As a result, we tolerate a here’s-what-I-can-offer-you approach instead of insisting on a more professional ethic of let’s-get-you-exactly-what-you-need.

And by failing to adopt client best interests as the standard for all advice, and correspondingly failing to insist that all practitioners advise with full candour, we make it harder for good advisors to do the right thing in a competitive environment. This, too, limits choice, since it effectively deprives investors of critical input about unpleasant but important alternatives.

The thing is, we ourselves have a choice in all this. We can keep letting these limitations and their consequences arise, as they do now, by default. Or we can choose to re-engineer the process, using the best interests standard as an organizing principle, and thereby make the process one that better serves the needs of everyone involved.