{"id":456905,"date":"2022-12-12T00:20:00","date_gmt":"2022-12-12T05:20:00","guid":{"rendered":"https:\/\/www.investmentexecutive.com\/?p=456905"},"modified":"2022-12-12T07:02:12","modified_gmt":"2022-12-12T12:02:12","slug":"making-a-case-for-no-frills-investment-advice","status":"publish","type":"post","link":"https:\/\/www.investmentexecutive.com\/newspaper_\/news-newspaper\/making-a-case-for-no-frills-investment-advice\/","title":{"rendered":"Making a case for \u201cno frills\u201d investment advice"},"content":{"rendered":"

This article appears in the December 2022 issue of <\/em>Investment Executive. <\/em>Subscribe to the print edition<\/a>, read the digital edition<\/a> or <\/em>read the articles online<\/a>.<\/em><\/i><\/p>\n

Investors with small nest eggs often find advice in short supply. The U.K.\u2019s Financial Conduct Authority (FCA) is trying to address this challenge with proposals for a cheaper \u201cbasic advice\u201d model that may provide lessons for the Canadian market.<\/p>\n

In a consultation paper, the FCA detailed reforms designed to make supplying advice to an underserved portion of the market easier. In the U.K., this market includes an estimated 4.2 million investors with at least \u00a310,000 in cash \u2014 potential clients with the means to invest but not necessarily the opportunity, as financial firms typically target wealthier investors.<\/p>\n

A shortage of advice for lower-net-worth investors has been documented in Canada too, including among investors working with a financial advisor. In a 2019 study, the Ontario Securities Commission\u2019s Investor Advisory Panel (IAP) reported that many investors aren\u2019t receiving basic advice regarding financial planning, budgeting and estate planning despite implicitly paying for it through embedded compensation structures such as investment fund trailer fees.<\/p>\n

The shortage was particularly acute for investors with less than $50,000 and \u201cmass market\u201d investors with $50,000 to $100,000, the panel noted.<\/p>\n

The IAP\u2019s research sought to challenge the assertion that eliminating embedded compensation would create an \u201cadvice gap\u201d by making serving smaller clients uneconomical. The report argued that since the gap already exists, regulators should tackle the conflicts of interest and other regulatory concerns arising from embedded compensation.<\/p>\n

Ultimately, the Canadian Securities Administrators (CSA) eliminated trailer fees only for dealers that are prohibited from providing advice (i.e., discount brokers), leaving the advice gap for another day.<\/p>\n

One possible answer is robo-advisors. However, the FCA\u2019s paper stated that while automated advice can work for some investors, robo-advisors have met with limited success in the market: \u201cOur research shows that customers tend to prefer human interaction and benefit from a personal recommendation.\u201d<\/p>\n

Now, the FCA wants to make providing human advice to smaller clients more economical. The proposed \u201cbasic advice\u201d regime would impose less stringent regulatory requirements while preserving investor protection.<\/p>\n

The proposed regime would allow advisors to recommend a limited set of \u201cmainstream\u201d investments under a streamlined suitability process that reflects the lower risk of dealing in straightforward products. Lower proficiency standards would reflect the reduced complexity of the required advice. On the compensation side, investors would be able to pay for transactional advice in instalments.<\/p>\n

\u201cWe are proposing this change because we want consumers who would otherwise be interested in advice but put off by the initial fees to be more able to access core investment advice,\u201d the FCA\u2019s paper stated.<\/p>\n

The proposals are out for comment and the regulator intends to finalize the new regime in the spring of 2023, with implementation by April 2024.<\/p>\n

In Canada, investor advocates welcome the idea of a basic advice regime but question whether regulation is what\u2019s preventing it.<\/p>\n

Jean-Paul Bureaud, executive director of FAIR Canada, said improving access to advice for lower-net-worth investors may encourage them to save more and build wealth more effectively: \u201cThe idea of expanding access to good financial advice in Canada is certainly worth considering and investigating more deeply.\u201d<\/p>\n

However, Bureaud is skeptical of the FCA\u2019s proposed streamlining of regulatory requirements. \u201cIt\u2019s not clear to me that regulatory standards are the main barrier,\u201d he said. \u201cThere could be many other reasons, including that potential investors do not want to pay the fees, that they may not trust the industry or that they may not know who to approach or where to start.\u201d<\/p>\n

If other reasons exist, \u201clowering investor protection standards may not lead to any meaningful change in this phenomena,\u201d Bureaud said.<\/p>\n

Neil Gross, former chairman of the OSC\u2019s IAP and now a member of the CSA\u2019s new IAP, also supports the idea of improving access to basic advice. \u201cMany consumers\u2019 investment needs are pretty straightforward, so an affordable basic advice package is a great idea,\u201d he said.<\/p>\n

However, Gross cautioned that firms must buy in and fill this gap in the market.<\/p>\n

\u201cMaking it work will take more than just finding service delivery efficiencies and combining them with an accommodating regulatory design. It will also depend on the emergence of industry players who see a strong business case for tapping the mass market instead of just chasing high-net-worth clients,\u201d he said. \u201cSo, before regulators start proposing this, perhaps they should ensure there are firms convinced that a \u2018no frills\u2019 brand of advice will be lucrative.\u201d<\/p>\n

Assessing industry appetite should be easier in Canada due to self-regulatory organizations, which the U.K. eliminated long ago. But while one of the long-term goals of Canada\u2019s SRO reform is to enable greater industry innovation, the new SRO won\u2019t be able to nurture new business models for some time.<\/p>\n

\u201cThe key isn\u2019t a single SRO,\u201d Gross said. \u201cIt\u2019s an SRO with a single rule book \u2014 one in which like activities are regulated alike, and business just has to comply with one set of rules. As soon as the new SRO gets that in place, things will be much better.\u201d<\/p>\n

Harmonizing the industry\u2019s rule books is likely to take a couple of years. By then, the results of the FCA\u2019s basic advice experiment should be available for Canada\u2019s market players to assess.<\/p>\n","protected":false},"excerpt":{"rendered":"

Canada could learn from a U.K. proposal<\/p>\n","protected":false},"author":73592,"featured_media":456874,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[3013,3021],"tags":[2596,2355],"yst_prominent_words":[2269,4996,6415,6465],"acf":[],"_links":{"self":[{"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/posts\/456905"}],"collection":[{"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/users\/73592"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/comments?post=456905"}],"version-history":[{"count":4,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/posts\/456905\/revisions"}],"predecessor-version":[{"id":457108,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/posts\/456905\/revisions\/457108"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/media\/456874"}],"wp:attachment":[{"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/media?parent=456905"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/categories?post=456905"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/tags?post=456905"},{"taxonomy":"yst_prominent_words","embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/yst_prominent_words?post=456905"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}