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HERE IS THE BACKGROUND TO THE FOLLOWING ARTICLE IN THE NATIONAL POST ON JANUARY 31, 2015 BY DAVID PETT:

 

Prior to 1981 companies controlled the ‘captive’ agents who sold life insurance, annuities and segregated funds investment products. Agents could sell only the proprietary products offered by their company – and no other.

In 1981 a new life insurance product (Universal Life) became available that had a variety of market driven investment options.  It required professional advice – including advice on alternative products which captive agents could not sell.  

Over time agents left the captive agency distribution system to become independent agents/advisors/brokers. 

Today most independent agents are sole proprietors.

Today there are very few life insurance companies (5% to 10%) that employ ‘captive’ agents.

Today’s environment requires a professional fiduciary based advisory team format – that cannot exist within a sole proprietorship i.e. one advisor. It provides a generalist approach in a specialist market environment.

Captive agents are paid continuing commissions.

Fiduciary based advisors are paid a fee-for-service.

The new legislation is moving toward fee-for-service only as exists in the UK.

The current advisor will have great difficulty making the necessary transitions.

Most sole practitioners are ill prepared for succession.

The elimination of trailer commissions will make a sale very difficult.

Hence the title of the following column in the National Post by David Pett.

 

WHY YOU MAY BE SAYING GOODBYE TO YOUR FINANCIAL ADVISOR.

By David Pett

FP INVESTING

THE NATIONAL POST

JANUARY 31, 2015

 

Greg Newman doesn’t regret becoming a financial adviser instead of a lawyer.  Since graduating from law school in the mid-’90s, he’s carved out a comfortable life as an associate portfolio manager and director of The Newman Group,  a Toronto based affiliate of Scotia McLeod, and still feels good going to work most days.

But if he had to do it all over again starting now, he’s not entirely sure he’d make the same career choice. Many others likely share that thought.

New industry regulations, shifting demographics and ongoing product and technology innovations are threaten­ing the status quo of what was once one of the country’s most secure, if not sure­ thing, professions.

”When I made the call 18 years ago, I knew I had a good chance to be success­ful;’Mr. Newman said. “But the business is changing. It’s so much harder to start from scratch now than it was back then:’

Sweeping reforms being both enacted and contemplated by the country’s regula­tors in order to establish greater transpar­ency between advisers and their clients are one big reason for that.

Advisers are especially bracing for the second part of the Customer Relationship Model project (CRM2), which has already begun and will continue to be phased in over the next two years.

The new rules call for advisers to show more clearly how much clients are paying for investment advice, and also how their adviser receives that compensation, wheth­er directly from the client in a fee-for-ser­vice model or indirectly through trailing commissions paid by the fund makers, but ultimately passed on to clients.

Many are also anxious about the pos­sibility of a future outright ban on trailer fees as a form of compensation.

“We think such a ban is coming, and sooner than many think,” said Robert Sedran and Paul Holden, equity analysts at CIBC World Markets, in a report pub­lished last fall.

They believe the combination of in­creased disclosure and an elimination of trailer fees will undoubtedly shake the in­dustry and lead to structural changes in terms of fee levels, the products investors purchase, and the manner in which they make those purchases.

“That is not to say that there will be a massive loss of assets for the mutual fund industry or for advice channels. Both will remain in demand;’ they said. “Rather, it is more likely to result in    potentially sig­nificant customer churn that creates win­ners and losers:’

Advocis, the Financial Advisors Asso­ciation of Canada, said new regulations will have a particularly profound effect on small and medium-sized advisers, many of whom may be forced out of busi­ness as a result. It commissioned a study by PricewaterhouseCoopers last year that found the number of advisers in the United Kingdom fell by 25% when com­missions on retail investment products were banned and new professional edu­cation requirements were introduced.

But Andrew Kriegler, chief executive of the Investment Industry Regulatory Industry of Canada, believes advisers and investors alike are largely ready to adjust and will continue adapting as long as they have the flexibility to do so in a way that makes as much sense as possible.

“You have to be cautious. The process of evolution is something that is continuous and positive over time;’ he said. “There are obviously individual circumstances that don’t work as well as they did in the world that preceded this and many will have to change and in some cases those circumstances may no longer be viable:’

It’s already expected that adviser head­ counts due to retirement alone will dra­matically fall in the years ahead. The aver­age age of U.S. financial advisers is over 50 and roughly one-third are expected to retire within 10 years.

Reg Jackson, a senior investment ad­viser and portfolio manager with the JMRD Wealth Management Team, a Na­tional Bank Financial affiliate, said a sim­ilar trend is playing out here in Canada.

Many of the country’s older advisers, for example, may just decide to retire ear­ly due to the burden and cost of comply­ing with the new regulations.

A recent adviser study by BlackRock Inc. found that 41% of those polled list­ed regulatory change as a primary focus over the next 12 months.

“We’re seeing a shift in business mod­el,”  said Warren Collier, the new head of iShares in Canada.

In particular, he’s noticed a move to­ward fee-based structure versus trans­action-based models dependent on com­missions. Advisers also want to keep costs down so they are looking at exchange­ traded funds as an alternative to higher­ cost mutual funds and other investments.

“Advisers need to streamline their prac­tices,” said Mark Yamada, chief execu­tive of Pur Investing Inc.”They can’t add much value managing money for the time they spend trying:’

As a result, many experienced brokers are turning to low-cost model portfolios created by ETF providers, while others are contemplating alliances with Canada’s growing throng of robo-advisers that can provide cheap web-based portfolios.

“There are independent advisers that would love to work with us;’ said Michael Katchen, founder and chief executive of Wealthsimple Financial Inc. in Toronto. “They see advice as being the value they provide clients, not necessarily invest­ment management:’

Robo-advisers are also likely to benefit when investors finally see what they’re paying for advice as well as from the growth in passive investing over active management and even the rise of the               mil­lennial generation.

“We believe this channel appeals to the millennials, a group that is growing in both affluence and in its appetite for investment products;’ CIBC’s Mr. Sedran and Mr. Holden said in their report. “This group is web-savvy and is set to become more affluent, both as their careers de­velop and as their parents age:’

The changing landscape is also be­ coming increasingly difficult for an indi­vidual adviser to navigate, said JMRD’s Mr. Jackson.

He started in the business 20 years ago when he estimates 90% of advisers were independent stock brokers doing mostly transactional work and who “maybe had an assistant.

Today, Mr. Jackson believes 90% of ad­visers are working in teams, if not mega teams, to provide a whole range of prod­ucts and services.

“I know standalone advisers who do an exceptional job, but it is a dying breed without question;’he said. “You cannot be all things to all people on your own:‘

His team consists of 10 people spread out over three Ontario offices in Toronto, London and Waterloo. It includes four portfolio managers, two investment advis­ers and four client service representative, all of whom share financial planning and business development duties.

But Mr. Jackson said they almost need to hire a technology officer to monitor and keep the team’s website up to date and help improve online access for cli­ents. That person would also be in charge of social media and the new apps and smartphone features that are needed to service their clients.

“It really is a long list and a huge time commitment when you start to think about it;” he said.

Mr. Newman agrees that scale is para­mount  to  success  going forward.  It used to be possible to make a living from a $40 million book of business, but that may not be enough anymore.

”It’s a tough road for everyone, but the demands of the business today may lead to smaller guys with smaller platforms giving up;” he said.

Financial Post

dpett@nationalpost.com

 

 

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