Digitization, Re-regulation and Professionalization for the Benefit of Clients: The Challenges Facing Financial Advisers

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1 Digitization, Re-regulation and Professionalization for the Benefit of Clients: The Challenges Facing Financial Advisers By Henri-Paul Rousseau Vice-Chairman of the Board, Power Financial Corporation 2017 Insurance and Investment Convention November 14,

2 The challenges facing financial advisers The hurricane The tsunami The choppy waters A new balance Humans at the helm 2

3 Digitization: Financial advisers facing hurricane of new technologies 3

4 Five factors fostering the development of the hurricane 1. Phenomenal computing power, ubiquitously available, at a low cost 40 years of Moore s law in action 2. Other technological advances (e.g., cloud computing) drastically reducing the cost of starting companies and serving clients Multiplier effect on innovation 3. Rapid and massive connectivity (broadband networks) of people and objects 4. Massive and accelerating data creation More data has been created in the past two years than in the entire previous history of mankind 5. New attitudes and demands on the part of users Fast adoption by clients of the new functionalities made available 4

5 Specific occurrences of the hurricane in wealth management and insurance Access to data Portfolio information available in real time and via multiple channels to both clients and service providers Utilization of data Comprehensive analysis (data mining) Taking analysis and system responses further: artificial intelligence Collaboration/democratization in the validation of data Distributed ledger technology (blockchain) 5

6 Technologies that impact the client-adviser relationship in various ways B 2 C B 2 B B 2 B 2 C Fintech Incumbent Adviser Fintech Incumbent Adviser Fintech Incumbent Adviser Client Client Client 6

7 Digitization changes every aspect of the job of the financial adviser New products New portfolios New analytical techniques Big data Artificial intelligence New management support functionalities Reporting/disclosure Portfolio building Accounting Compliance Data aggregation Product/portfolio supply Platforms, new ecosystems Disintermediation New procurement, communications and distribution methods Social networks, omnichannel New client expectations Functionalities Access Customization 7

8 Legal and technological developments favouring data aggregation Canada: Federal Department of Finance: intent on examining the merits of open banking (Consultation paper, August 2017) United States: Screen-scraping technology CFPB: Consumer Protection Principles (October 2017) United Kingdom: Open Banking Standard (January 2018) European Union: PSD 2: Payment Services Directive (January 2018) GDPR: General Data Protection Regulation (May 2018) 8

9 Data aggregation alone has the potential to transform the client-adviser relationship Now: Advisers have the initiative and the power In the future: Clients control their data they have the power 9

10 Re-regulation: Financial advisers facing a regulatory tsunami 10

11 The origin of the tsunami Global financial crisis Regulations favouring financial system stability Unacceptable market behaviours Regulations on market conduct Better consumer protection Regulations on professional conduct 11

12 The activism of regulatory authorities Transparency CRM1, CRM2 Disclosure at point of sale CRM3? Increased oversight of banks Financial Consumer Agency of Canada Enhancement of the obligations of registrants Know your client Know your products Suitability Proficiency Conflicts of interest Compensation methods (including embedded commissions) Regulatory best interest standard AMF and the Canadian Council of Insurance Regulators (CCIR): Managing conflict of interest risk in relation to incentives New regulatory bodies (Pan-Canadian) Capital Markets Regulatory Authority Ontario: Financial Services Regulatory Authority 12

13 Feliks, fel-x.deviantart.com In choppy waters with clients 13

A shakeup in the client-adviser relationship Lack of knowledge Low rate of financial literacy 42% Perception of clients: a complex, confusing world IIROC IIAC FCAC Account Director Bank of Canada

14 A shakeup in the client-adviser relationship Lack of knowledge Low rate of financial literacy 42% Perception of clients: a complex, confusing world IIROC IIAC FCAC Account Director Bank of Canada Brokers OSFI Group Savings Representatives ETFs CFA Chartered Banks CSA IQPF AMF MFDA CDPSF Insurance Brokers CCMA Mutual Funds CCIR CSF CAsD Segregated Funds APCSF Securities SOURCE: Boisclair, Lusardi, and Michaud, Financial Literacy and Retirement Planning in Canada, Journal of Pension Economics and Finance, December 2015, pp.1-20 Bank Products Credit Unions Certificates of Deposit Insurers Insurance Products 14

15 A shakeup in the client-adviser relationship ON-OFF distrust Satisfaction among clients who have an adviser 83% Distrust among those who do not have one 41% SOURCE: BCSC study; Edelman Trust Barometer (Canada) Financial Industry Analyst 15

16 A shakeup in the client-adviser relationship Misconduct that hurts the image of the profession Media coverage of frauds Ponzi Portus Earl Jones Fulcrum Financial Norbourg Norshield Madoff Mount Real 16

17 A shakeup in the client-adviser relationship Low rates for the use of advice 27% for households that are not prepared for retirement 49% for households that are prepared for retirement 30% for all Canadian households SOURCES: McKinsey & Company, Building on Canada s Strong Retirement Readiness (February 2015) Figure 4 (households without an employer pension plan); BCSC, Smarter Investor Study (all households) 17

18 A shakeup in the client-adviser relationship Knowledge/ lack of knowledge Literacy Distrust/ trust Wrongdoings Use of advice 18

19 raising questions about the adviser s business model 19

20 The challenges facing financial advisers Relevance (of the adviser) Disintermediation of the adviser Client expectations: cost vs. benefit of advice Technology Competition from or complementarity of automated ( robo ) advisers? Compliance Increasingly numerous and complex standards and regulations Efficiency and scale Increasing costs / decreasing unit payments What business model? Growing importance of the brand Who should take responsibility for compliance and technology investments the adviser or the organization? 20

21 Finding a new balance 21

22 Getting back to basics: What financial advice really is Investment management α Alpha Stock picking or mutual fund picking, e.g. Which stocks? Which funds? Market timing β Asset allocation, e.g. How much exposure to market? How many local vs. international assets? Investment policy Beta Investment style, e.g. Active or passive management? Suitability of investments vs. risk profile? γ Investment behaviour Gamma Encouraging engagement, e.g. Starting to save / managing debt Quantum of savings Staying the course How best to save, e.g. Taking advantage of tax incentives Best product structures Financial plan SOURCE: Morningstar: Alpha, Beta, and Now Gamma,

23 Financial advice has substantial value Impact on wealth Financial assets under management (median) in $K Ratio: Financial assets under management with and without financial advice 4.2x x 1.99x 2.73x 24 Without advice With advice Number of years with financial advice SOURCE: CIRANO, Econometric Models on the Value of Advice of a Financial Advisor, 2012; also published in: ANNALS OF ECONOMICS AND FINANCE, 16-1 (2015), pp

24 Financial advice has positive social and economic impacts Better preparation for retirement The Canadian retirement system relies in good part on individual savings Greater financial well-being Better attendance at work, better health Higher national savings rate Fosters investment, productivity, economic growth and domestic control of businesses Intergenerational wealth transfer A growing phenomenon in Canada 24

25 The majority (62%) of Canadians financial wealth is invested with advice $2.6T 85% 15% With financial advice $1.6T 36% 64% Without financial advice Investments Deposits Total: $4.2T Year-end 2016 SOURCE: Strategic Insight 2017 Investor Economics Household Balance Sheet Report Canada 25

26 Great job, financial advisers! 26

27 Where do we stand? Our challenges The hurricane The tsunami The choppy waters Our assets The well-established value of advice (gamma) The positive impacts The needs of Canadians 27

28 Now, what needs to be done to deal with the hurricane, the tsunami and the choppy waters 1. Become aware of and realize what financial advice really is: 1 A person-to-person interaction that is not based on a transaction, but instead is an advisory relationship that is built over time: an experience good 28

29 Now, what needs to be done to deal with the hurricane, the tsunami and the choppy waters 2 2. Use the power of the hurricane: Harness technology to serve the advisory relationship Automate and digitize as much as possible in terms of» Sourcing» Management» Client access in order to focus on what constitutes added value:» Acquisition (establishing the relationship)» Communication» Coaching: Help clients determine their needs Provide support for them during times of difficult market conditions Encourage them to stay the course» Provide creative solutions that are in the best interest of clients 29

30 Now, what needs to be done to deal with the hurricane, the tsunami and the choppy waters 3 3. Use the power of the tsunami: Harness the information provided by clients when establishing their investment profiles (regulatory obligation) The part of the questionnaire on the investor profile (risk tolerance) is particularly important» Good predictor of their inclination to use the services of a financial adviser Other information provided by clients will be useful General confidence Self-confidence with respect to investing Level of financial literacy 30

31 Now, what needs to be done to deal with the hurricane, the tsunami and the choppy waters 4 4. Faced with choppy waters, build on expertise in financial solutions Products, portfolios, planning as a teacher In the face of often weak financial literacy, communicate concepts effectively 5. and teamwork: as a coach Emotional intelligence in technology Means of communication, management and portfolio-building solutions, automated accounting and compliance 5 Taxation, estate law 31

32 Retaking control of the helm 32

33 Questions for the industry, regulatory authorities and policy makers 33

34 Supporting the client-adviser relationship 2 What can be done to reduce clients confusion in the face of a multiplicity of products, regulatory bodies and jurisdictions, designations and professional associations? How can the securities and insurance products sectors be decompartmentalized? How can we ensure comparable regulatory requirements across securities, bank products and insurance products? 34

35 Supporting the client-adviser relationship 2 How can we respect the heterogeneous nature of clients needs by enabling multiple business models to coexist at various price levels? 35

36 Supporting the client-adviser relationship 2 How can we ensure that clients continue to have access to quality financial advice suiting their needs at a reasonable price? 36

37 Supporting the client-adviser relationship 2 How can we properly explain to clients the value and the price of the advice they receive, as well as the way in which the adviser is compensated? 37

38 Supporting the client-adviser relationship 2 How can we ensure consistent service at given levels of price and expertise? 38

39 Supporting the client-adviser relationship 2 How can we properly communicate to the public the proficiency requirements for financial advisers, their various levels of expertise, their designations and the ensuing protection for clients? 39

40 Supporting the client-adviser relationship And, finally, the sink-or-swim issue 2 How can we ensure that the best interest of the client is placed before that of the adviser, and communicate that effectively? 40

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