The financial services sector’s failure to put the needs of clients first has damaged the bond with individual clients, and many who fled after the global financial crisis of 2008 have not come back, said Howard Atkinson, president of Toronto-based Horizons Exchange Traded Funds Inc., on Wednesday at a breakfast event featuring the Canadian Exchange-Traded Fund Association and CFA Society Toronto.
“The social contract between financial professionals and those we serve has been broken,” Atkinson said.
Specifically, he cited disruptive activities such as high-speed and high-frequency trading, fake bids and in-and-out trades as being damaging to public perception.
“I’m in the industry and I don’t think it’s right, so imagine how the man on the street feels,” Atkinson said.
Atkinson quoted global research conducted for the CFA Institute by New York-based public relations firm Edelman, in which both retail and institutional investors say that the most important attribute of financial advisors is that they can be trusted to act in the client’s best interest. About 35% of respondents cited this characteristic, followed by 17% who cited the ability to achieve returns and 17% referred to advisors’ commitment to ethical conduct.
Atkinson also highlighted the “Edelman Trust Barometer,” a measurement showing that the global public puts the financial services industry at the bottom of a long list of industries in terms of trust. In 2015, financial services ranked seventh after industries such as technology, automotive, food/beverage and pharmaceuticals, but managed to come out ahead of banks and media. In 2014, financial services came ninth on the list, lagging even banks and media.
“The costs of this failure are high,” Atkinson said. “Investors who don’t trust the industry won’t have a financial plan, they won’t save enough and there will be a ‘savings gap’ relative to their needs. This means they will be forced to work longer, they won’t have quality of life in retirement and the situation will put pressure on the next generation.”
It terms of what has contributed to the current lack of trust in the financial services sector, the most frequently cited factor is the lack of an ethical culture within financial services firms, followed by poor government regulation and enforcement.
Other research conducted jointly by U.S. firms Northern Trust and Greenwich Associates of institutional investors with more than US$500 billion under collective management found that 87% of respondents believe meeting their own unique investment objectives is more important than outperforming relevant benchmarks, Atkinson said, showing there is a need to truly know your client and understand individual needs and goals.
“The solutions are to commit to high ethical standards and align business practices with those, as well as determining and meeting client needs,” Atkinson said.
In particular, it’s important for advisors to help clients manage costs and risks, Atkinson said: “Your value is in helping clients manage risk and manage costs, as you can’t really manage returns.”
New rules coming into effect under the second phase of the client relationship model (a.k.a. CRM2) will shine the spotlight on advisor fees in Canada — and the trend is toward advisors adapting a fee-based model as clients become more aware of practices such as embedded commissions.
In the U.S., 65% of advisors are fee-based compared with 35% in Canada. And in countries such as Australia and the U.K., in which embedded commissions have been banned entirely, advisors are virtually all fee-based, he said.
In a later panel discussion at the breakfast meeting, John De Goey, vice president and portfolio manager with Toronto-based Burgeonvest Bick Securities Ltd., said he expects increased fee competition as a result of CRM2.
“There may be some depreciation in fees, but any drop would be relatively modest,” he said.
However, fellow panelist Jason Pereira, senior financial consultant and partner with Woodgate Financial Partners in Toronto, said it’s important that the new disclosure rules don’t create a situation in which fees are the only consideration in choosing products for clients, as it may make sense in some situations to sell a more expensive product as long as it can be justified by client needs.
“The concern is that all of this leads to recommending only the lowest-cost product,” he said. “Products may range in cost, depending on the needs of the client and the specific products.”