Misconceptions among regulators and consumers are hurting advisors and indeed the entire mutual fund distribution industry. It’s a double-edged sword that slashes the value of advice on the one side and pares participants’ trust on the other, says George Aguiar, president and CEO of GP Wealth Management in Toronto.
Aguiar talked about the viability of distribution at the 2010 Distributors’ Summit in Niagara-on-the-Lake. “There seems to be a misconception among regulators that advisors are making a lot of money, but are offering very little value for that,” he said. “And that’s simply just not the case.”
He cited research that says on average an advisor who manages an $85,000 portfolio would generate about $850 of income per year. “I know that industry-wide, we use somewhere from 90 to 110 basis points of assets to get a sense of what the gross revenue would be like,” he added.
He said the margins are very thin, even for a successful advisor who typically spends six hours on each file every year. “You take those six hours and divide it into $850 of revenue and you can do the math yourself.” But, he said, this fact just doesn’t seem to resonate with regulators.
Then there are dealer costs – registration, compliance, staff, financial audits, E&O and so on, which average about $7,000 a year. “These are just fixed entry costs, the basic costs of doing business.”
And every distributor is faced with technology costs about $3,000 per representative, which increase over time. “As an industry, I think this is yet another key point that we should look at to see if there are opportunities to justify those costs.”
The list of challenges faced by distributors is long and recently rife with misplaced notions. “There have been policy discussions with regulators over the last few years that have illustrated a lack of understanding and appreciation for the real value that financial advisors bring to their clients.” He said they completely discount the cost of advice that’s embedded in the placing of a mutual fund with a client. And it’s not only misunderstood by regulators, but also by consumers.
And that’s further complicated by the “misconception that the advice should be directly related to performance.” Aguiar asserted many financial advisors provide advice beyond just retirement planning. “There’s also this view that trailers or service fees are a conflict of interest, or that advice should be unbundled from the product and paid directly.”
The issue of suitability and the MFDA’s recent posting of rigorous rules to govern screening of investment recommendations is another issue the industry is grappling with. Mistrust has yet again proven to be the root of all evil. “You know, at the heart of the suitability issue is really the lack of trust that regulators have in the ability of a financial advisor to provide advice.”
The irony is that, on the one hand, advisors are registered with an SRO and so have certain obligations for client care which they’ve accepted and yet, on the other hand, the SRO distrusts the advisor’s ability to actually fulfil those obligations. Aguiar said this flies in the face of sequential research, done year after year, that supports the notion that investors are satisfied.
“And that research has been done even through a negative market cycle. So we’re not sure exactly where that perception comes from; the evidence is there,” he points out.
An aging pool of advisors is something distributors must deal with more proactively, he adds. “We noticed that the average financial advisor is around age 47,” said Aguiar. “Between 2006 and 2007, the number of advisors younger than 30 years of age has actually decreased from 10% down to 8%, and that’s a troubling statistic.”
He said 14% of advisors range from 18 to 34 years old, 56% are over age 45, while those over 60 have grown from 7% to 10%. Industry, he said, has seen the growth of assets, but that does not seem to have attracted young advisors into the distribution channel. “So you can see there’s likely to be some significant problems in the next decade.”
The litany of issues was rounded off with the one that has been causing much discord and disharmony: Harmonized Sales Tax. It’s early days for Ontario’s HST, but it will have an enormous impact on the industry.
Aguiar is particularly concerned about the impact of the tax on mutual funds. “HST is going to be imposed on mutual funds, and no matter what jurisdiction you live in you’re going to be faced with an additional cost.”
This can potentially create product arbitrage, given certain jurisdictions don’t have a provincial tax, so their residents are going to see an increase in cost. Aguiar argues the whole HST idea is ill-conceived. “Moreover, fundamentally, it’s wrong. It contradicts the pension reform debate, where they’re saying that Canadians are not saving as much. Yet they want to tax Canadians on their savings,” he said.
Further, he noted, the issue of pension reform – which includes proposals to implement a mandatory supplementary pension plan – is ill-conceived and could wipe out a significant portion of the market for advisors. “If clients are mandated to save towards a supplementary pension plan, there’s going to be less going into things like education funding, home purchase, and other things that advisors do to help people reach their financial goals.”
The industry, he suggested, must counter these issues by doing a better job of developing strategies, and by advocating the value of a healthy distribution network, and the value of advice.
Despite all these issues, he assured, the industry is not doomed. “The industry is in better shape today than it was ten years ago,” he said. “And my guess [is] ten years from now we’ll be better than where we are today.”