The client base for financial advisors is mushrooming in size, but issues of trust need to be addressed if advisors are going to be able to take full advantage of this trend.
That was one of the key themes emerging from the ETFs as a Catalyst for Canadian Advisory Growth conference, sponsored by S&P Dow Jones Indices, in Toronto on Wednesday.
Quoting research from PricewaterhouseCoopers (PwC) Canada, Beth Hamilton-Keen, director of private client management with Calgary-based Mawer Investment Management Ltd. and incoming chairwoman of the CFA Institute’s board of governors, said that between 2010 and 2020 it is predicted that one billion middle-class consumers will emerge globally.
This represents the largest increase in potential clients within a single decade in history, driven largely from growth in South America, Asia, Africa and the Middle East.
Furthermore, PwC Canada research predicts that global investible assets for the asset-management industry will increase to more than US$100 trillion by 2020, based on a compound annual growth rate of almost 6% during the same period.
“Citizens around the world need us more than ever and will need us even more in the years to come,” Hamilton Keen told the audience, which consisted largely of financial advisors and money managers. “The bad news is that many potential clients don’t see our value as investment professionals. Many are concerned they will not meet their investment objectives.”
The financial services sector faces a serious lack of trust on the part of the public that encompasses such areas as fees, practices and ethics. A survey of investors conducted by the CFA Institute and New York-based public relations firm Edelman found that 52% had trust issues with the financial services sector, placing it eighth overall below the technology, food, pharmaceuticals, consumer, automobiles, telecommunications and banking sectors.
The reasons cited for the lack of trust in the financial services sector include a poor ethical culture within firms, market disruptions, lax government enforcement and poor regulation.
“For a business that relies on trust, this is not good news,” Hamilton Keen said. “Investors who do not trust the industry are unlikely to save and invest for their future or achieve their long-term financial objectives.”
In turn, Hamilton Keen sees the new disclosure requirements coming into effect as part of the second phase of the client relationship model as a regulatory response to investor concerns, helping clients identify fees and measure performance.
“There is an opportunity for wealth managers to differentiate themselves and develop a stronger relationship with clients if they address these things proactively,” she said. “For some clients, some of these disclosures may come as a shock.”
A common theme among many speakers at the conference was that financial services firms and advisors must examine carefully how they add value in helping clients meet their financial goals, and be able to explain this to clients.
For example, cost savings are a valuable contribution to returns for clients, and those savings can come from a variety of means besides investment returns, said Raymond Kerzerho, director of research with PWL Capital Inc. in Montreal.
“A dollar saved is a dollar saved, whether it comes from using lower-cost products such as ETFs or effective tax strategies,” he said.
In addition, James Morton, portfolio manager and financial advisor with the Morton Group in Toronto, which operates under the CIBC Wood Gundy umbrella, said a fee-based practice aligns advisors’ interests more closely with their clients’ interests than a commissions-based practice.
That’s because a fee-based practice removes the incentive to make product recommendations based on the higher trailer fee paid on equity mutual funds relative to other asset classes. A fee-based advisor could move a client to cash if deemed appropriate and still make an annual fee.