Investigating the Merits of Regulating Financial Planners in Ontario January 30, 2014

Transcription

1 Changing how the world does planning Investigating the Merits of Regulating Financial Planners in Ontario January 30, 2014 A statement of views by: Shawn Brayman President & CEO PlanPlus Inc. 411 Richmond Street East, Suite 203 Toronto, ON Disclaimer This document outlines the personal views of Shawn Brayman in respect to this topic and does not necessarily reflect the position of any firm, any membership association or other group to which I may be affiliated. My Background For the purposes of this discussion it may be valuable to understand the perspective from which my views have evolved. I am the founder and the CEO of PlanPlus Inc, a corporation in the Province of Ontario that has developed and delivered financial planning and financial advisory software, support technologies and training services for over 25 years. Our clients include banks, credit unions, IIROC firms, MFDA dealerships, insurance firms, accountants, independent financial planners or advisors and more, not only in Canada, but also in 30 other countries around the globe and in several languages. I completed my Chartered Financial Planning certification in Ontario in I have personally received multiple awards for primary peer-reviewed research in the field of financial planning and have spoken at financial planning conferences or events on every continent (except Antarctica) and am a regular speaker at planning conferences in Canada. I am a member of the Board of the Financial Planning Association located in Denver, CO the largest association of financial planners in the world where I have also acted as the volunteer Chair of the Global Advisory Council and other roles within the association over the years. I do not work directly with consumers as a financial planner so I do not have the benefit of that perspective, although I have talked to consumer audiences on many occasions and in many countries. I have worked, trained or presented to tens of thousands of financial advisors over the years. As a result of the unique circumstances of my business and my background, I expect that I would be recognized as someone who has had exceptionally high exposure to the profession and the industry on a global basis. Question What do we mean by Financial Planners or Financial Planning? 1

2 Before answering the four specific questions raised in the outline, when we look at the general question of regulating financial planners who or what constitutes a financial planner? Financial Planning is often referred to as a process and there is an ISO standard that documents what constitutes personal financial planning. It allows third party certified or self-declared individuals who follow the process to be financial planners. Similar practice standards are outlined in designations like the Certified Financial Planner 2 which is tied to a proprietary standard currently available in 23 or 24 countries including Canada. Following the process does not make a financial planner and many planners do not follow all of the process as a plan is often simply used as a sales tool in an initial meeting and there is no concept of reviews or monitoring as there is no money to be made from product sales. Is a financial planner just an individual with certain competencies or a designation? Many people with CFPs, RFPs, CAs, CFAs and more hold out as financial planners. Many people with planning designations do not do financial planning they use the designation as a credibility tool to sell products. There are many terms used other than financial planner which to a client are indistinguishable from financial planner wealth advisor, family wealth planner, estate specialist, retirement income specialist. Is financial planning the delivery of advice on retirement or estate planning or investments or needs on death or all of these? Needs-based selling is a tried and true technique used in many fields not just finance. Most insurance sales illustrations demonstrate products over the life of the client but these are sales illustrations to sell the merits of a product, not planning advice. It is hard to tell the difference when a consumer sees a projection that appears to be something it is not. Is financial planning a profession like a doctor or a lawyer or an accountant, where the professional is engaged by a client and has a fiduciary responsibility to the client? Someday (soon) I hope. Question 1 Is Ontario s current regulatory approach in relation to financial planners appropriate? No. As stated in your own preamble any thought of a current regulatory approach is buried in a product sales channel and for the most part comes down to a simple statement if the firm an advisor is licensed with has oversight responsibility for advice and financial planning or not. IIROC is, MFDA and insurance are not and planning advice seems to remain the responsibility of the individual. There is no control of any terminology, allowing a simple annuity salesperson to call themselves a Retirement Income Specialist because the product they sell is for retirement or a Wealth Manager because they manage the client s money

3 The existing lack of structure leaves the consumer open for confusion and abuse and is a dis-incentive for anyone to spend the time to become a true professional as they have no way to distinguish themselves from those exhibiting good marketing skills with a title as opposed to good advisory skills. Finally, even those individuals that have competencies, designations and abilities are almost entirely compensated by products they sell. As evidenced in every country worldwide, compensation drives behaviour. Banks have campaigns to sell specific products and compensate all their sales channels (including financial planners) to hit quotas. Fees related to equities are higher than fixed income, creating an unquestionable bias to encourage higher levels of risk. There is no simple method to reconcile these pressures with placing the clients interest first or a fiduciary responsibility to the client. Investment channels that provide financial planning advice are compensated by asset gathering and high MER or DSC products for them to be paid, even if low or minimal cost index funds or ETFs would do as good or do a better job for a client. The concept of taking any of those investment assets on which they are compensated and suggesting to the client they pay down debt (upon which they may also be compensated) is a lose-lose situation for them and will only be recommended in small percentage of cases. Question 2 How would you improve Ontario s current regulatory approach? 1. Protect the term Financial Planner and restrict salespeople from creating variations that confuse the public and obfuscate the truth. 2. Financial planners should be registered separately with an appropriate professional body and be subject to professional standards, continuing education, code of ethics. Financial planners should be subject to a fiduciary standard as a professional. 3. Financial planners must be compensated directly by the client. The concept of disclosure is getting better on the investment side with proposed changes but the insurance sector has embarrassingly high commissions what no one wants to tell a client. How do you tell a client that he will pay 150% of first year premiums to you as commissions? Simply put people do not. They make ambiguous disclosures like I may receive a commission in the event you implement an insurance or annuity product. 4. Regulate that insurance firms must provide the equivalent of a commission-free product for direct consumer purchase or financial planners compensated directly by the consumer to recommend. Current limitations create expensive administrative hurdles to unbundle embedded commissions where this can even be done because of limitation in rebating commissions. People will not pay for objective advice if they then need to pay all the same commissions on the products, which allows sales people to infer they are providing the same type of advice for free. 5. I appreciate this may be an issue for Revenue Canada and not the Ontario Government, but advice delivered as an embedded fee in an investment vehicle is pre-tax whereas if a consumer pays for the same advice directly it is not deductible. 3

4 Even the playing field by making embedded commissions non-deductible. I appreciate that portfolio management fees are costs in theory related to earning income from the investments and should remain deductible. Alternately make financial planning fees deductible. Whatever approach taken, to not provide tax benefits to commission approaches over direct consumer fees. 6. If direct compensation by the client is deemed to be too great a leap, a financial planner engagement with a client should be at a fiduciary level and it should not be allowed to change to something else to implement product. This switch hats and standards of care model has been used in the US and opens the door for significant abuse. A consumer believes they are dealing with a professional then when the implementation occurs the standard of care invisibly becomes a suitability standard and the advisor can now sell any product deemed suitable which is very different than client best interest. If a client engages a professional fiduciary financial planner the standard of care must remain fixed in all aspects of the relationship even of the product channel for implementation allows a lower standard of care. Question 3 Are there approaches to regulating financial planner which you would recommend? 1. If we look at Quebec and Bill 188 I would argue that also it protected the term financial planner or planification financiere, it was not successful in distinguishing a profession since all/most planners remain commission compensated and rewarded and other terms like Wealth Advisor remain not only in use but often even more desired by an advisor. 2. India 3 introduced what I believe to be one of the best models. Financial salespeople must self-select how they will operate: a. If they are paid fees by the client (not commissions by a product manufacturer) they can be a planner or advisor; b. If they are compensated by embedded commission they cannot call themselves an advisor, they are a sales person. 3. Malaysia introduced separate registration of Financial Planners but I believe mistakenly linked this with Independent Sales Channels. Most sales forces in Asia remain captive channels for a fund house or single insurance firm. Here the feeling was that being a financial planner meant access to products outside tied channels. This does not alter the basic commission driven relationship of the advisor and the client, just adds more products to the suite to sell. 4. We assume the regulator is quite familiar with actions by what was the FSA in the UK and definitions of tied, multi-tied and independent. 3 SECURITIES AND EXCHANGE BOARD OF INDIA NOTIFICATION Mumbai, the 21st January, 2013 SECURITIES AND EXCHANGE BOARD OF INDIA (INVESTMENT ADVISERS) REGULATIONS,

5 Although these other models are worth evaluating, I believe the underlying question is what is the goal for regulating financial planners in Ontario? If the desire is to allow regulation to define a clear channel of professional financial advice that a client can rely on as being in their best interest: It will be impractical to restrict the ability for a financial intermediary to not provide advice. Further this may limit access to some forms of advice in lower income channels that would not be of value to many Canadians. In the same way I can elect to file my own taxes, hire anyone to do it for me (no qualifications necessary) or hire a Chartered Accountant, advice will be generated from many sources including tools on the internet, every shape and form of individual in the market and by some professional financial planners. What is important is that I can tell who the final category are and be confident that their only interest is my best interest and not behavior linked to third party compensation. Question 4 Would regulation affect your business model(s) of providing financial planning services and, if so, in what way? PlanPlus does not provide direct to consumer planning services but instead supports financial intermediaries in doing so. In respect to this proposed regulation, do I believe it should affect the business model(s) of providing financial planning services absolutely. Most financial channels in Canada believe that a Financial Planner is an end-state salesperson someone who can sell any product, has good experience and their role is the ultimate gatherer of assets with the credibility of a planning veneer. As long as this remains the case the consumer will never know whom they can trust. I remain a passionate believer that there is an important role for professional financial planning in Canada and indeed the world. Unfortunately after watching for 25 years it is evident that it will not properly emerge until the regulator helps to define what constitutes a professional financial planner for any one of the dozens of other financial intermediaries and firms simply looking for a better cross-selling model. Best regards, Shawn Brayman President & CEO PlanPlus Inc. 5