consumer VOICE Survey 2015 Investor Insights on the Financial Advice Industry NOVEMBER 2015
over VIEW There is currently much discussion regarding the financial advice industry in Canada, including what Canadians value, need and want. do canadians value financial advice? If so, do they care how they pay for it? This national research focuses on the views of consumers who are currently working with a financial advisor. Advocis commissioned research to understand consumers perspectives and to provide a clearer picture of how clients of financial advisors value the advice they receive. Among the many changes being considered, securities regulators in Canada are considering changes to the way financial advisors are compensated for the advice they provide. One of the options is to ban third-party commissions paid to financial advisors by their dealers for the advice provided to consumers in assisting them with their mutual fund purchase decisions. Such a ban would be similar to what has taken place in other jurisdictions such as the United Kingdom and Australia. In both countries, early results indicate the banning of third-party commissions has resulted in an advice gap where high-quality financial advice is increasingly unobtainable for those who need it most.
INVESTOR INSIGHTS ON THE FINANCIAL ADVICE INDUSTRY NOVEMBER 2015 study OBJECTIVE The study objectives include, but are not limited to, the following: ^^To examine the level of value that investors place on the advice they receive from their primary financial institution and financial advisor; ^^To measure the awareness and understanding of various fee models; ^^To examine the satisfaction investors have with the services they receive and the fees they pay; ^^To investigate the level of expectations investors have as it relates to advice; ^^To examine investor perceptions and attitudes with respect to how their advisor(s) is/are paid; and, ^^To investigate investor attitudes toward implementing regulatory restrictions on how advisors are compensated.
survey METHODOLOGY ^^In total, 1,739 Canadian investors with a financial advisor who is a member of Advocis participated in the research. This represents a margin of error of +/- 2.35% (at a 95% confidence interval). ^^This is a national survey; data has been weighted to reflect the distribution of the Canadian population (excluding Quebec). ^^The online survey was distributed by advisors to a sample of their clients. ^^Data collection took place between January and March 2015. ^^The entire research process was executed by PMG Intelligence, a Waterloo, Ontario-based market research and data intelligence company.
SURVEY RESULTS value of ADVICE I
AREAS THAT CONSUMERS GET ADVICE ON Consumers are of two camps when it comes to their level of engagement when working with their financial advisor to invest their money 47% make investment decisions with their advisor while 49% generally accept their advisor s recommendations without much research. Those most engaged noted having an established relationship with their financial professional and cited a greater likelihood of having worked with their professional for more than 10 years. Subsequently, these consumers approach their investing process as a collaborative effort. This speaks to the trust relationship between the advisor and client. Consumers received advice from a professional financial advisor on topics ranging in complexity from investment planning through to budgeting. For a significant majority of consumers, professional advice is not only sought but largely required for more complex areas such as investment planning (95% received advice), retirement planning (93% received advice), wealth accumulation (88% received advice) and insurance (80% received advice). While not all advice that is provided is necessarily implemented, this research shows that the majority of consumers who obtained advice in specific areas implemented their learnings. Results indicate that consumers used the advice they received in areas including investment planning (93%), retirement planning (89%), wealth accumulation (83%), and insurance (75%). QWhen you go through the decision-making process of selecting how to invest your money, which of the following best describes how the decision is made? 47% You and your professional financial advisor make investment decisions together 1% You research and provide your financial advisor with your investment choices 49% You follow the investment advice provided by your financial advisor 3% Your professional financial advisor makes the decisions for you More than 10 years working with a financial advisor Less than 10 years working with a financial advisor 2
INVESTOR INSIGHTS ON THE FINANCIAL ADVICE INDUSTRY NOVEMBER 2015 Although many consumers do not believe they have paid for financial advice across the topics measured investments, retirement, wealth accumulation, insurance, goal-setting, tax and estate planning, debt reduction, and budgeting the majority indicated they would and particularly as it relates to investment planning (65%), retirement planning (62%), wealth accumulation (56%), tax planning (53%), and estate planning (51%). 55% of consumers use their professional financial advisor for both insurance and investments QFor each of the following topics, please indicate whether you have ever received advice from a financial professional and which advice you have used. Investment planning Retirement planning Wealth accumulation Insurance needs Short-term goal setting Tax planning Estate planning Debt reduction Budgeting Received advice Used advice 11% 81% 95% 93% 14% 79% 93% 16% 89% 76% 88% 17% 83% 75% 80% 17% 75% 74% 5% 20% 80% 69% 70% 5% 20% 69% 69% 65% 6% 20% 62% 68% 6% 22% 57% 68% 56% 6% 21% 49% 67% 44% 40% 39% 12% 12% 13% 22% 3
VALUE OF FINANCIAL ADVICE One of the most insightful findings confirms just how valuable financial advice is to consumers. When asked how valuable the financial advice they receive is to them, 96% of respondents said that it was very valuable or somewhat valuable ; a mean of 9.2 out of 10. The correlation between consumers perceived value and the amount they pay is a topic of great interest. When asked if the advice received is worth the money they pay, 75% of consumers reported that they feel their advisor is completely worth the money they pay. Women are on average 14% more likely to definitely need to talk to a professional financial advisor when purchasing investment products and particularly as it relates to mutual funds, stocks, and guaranteed investment products. Women demonstrated similar levels of comfort as men with products dealing with insurance. The significance of the partnership between clients and their advisors is captured in the fact that consumers rely on their advisors to provide them with trusted guidance. The data shows that consumers prefer to involve their financial advisor when deciding which products to purchase, despite the product s level of complexity. For example, the majority of consumers are not comfortable purchasing investment and insurance products without the guidance of a professional. Retirement income products such as annuities, guaranteed income products, and segregated funds were products that consumers indicated as needing the greatest assistance with (75% or more cited requiring a professional). Although consumers noted greater comfort with purchasing GICs and personal health insurance, 46% and 52% respectively would still definitely go speak to a professional to purchase. VERY VALUABLE 19% 2% 77% 1% 1% SOMEWHAT VALUABLE NEITHER NOT VALUABLE OR VALUABLE NOT AT ALL VALUABLE NOT PARTICULARLY VALUABLE 9.2 MEAN 1 2 3 4 5 6 7 8 9 10 4
INVESTOR INSIGHTS ON THE FINANCIAL ADVICE INDUSTRY NOVEMBER 2015 Exchange Traded Funds (ETFs) Annuities Guaranteed income products Bonds Guaranteed Investment products, such as GICs Long term care or critical illness insurance Money market mutual funds Stocks Personal health insurance Segregated Funds Mutual funds excluding money market Life insurance (including term and whole life) Yes No Not Sure 8% 80% 12% 13% 75% 13% 22% 68% 9% 23% 69% 8% 32% 60% 8% 33% 63% 34% 52% 15% 37% 55% 8% 43% 54% 48% 38% 14% 70% 20% 10% 75% 23% QFor each of the following products, please indicate which you currently own, if any. Definitely would speak to pro Probably would speak to pro Probably comfortable purchasing on own Definitely comfortable purchasing on own Unaware of product Annuities Guaranteed income products Segregated Funds Exchange Traded Funds (ETFs) Mutual funds excluding money market Stocks Life insurance (including term and whole life) Bonds Long term care or critical illness insurance Money market mutual funds Personal health insurance Guaranteed Investment products, such as GICs 76% 17% 75% 16% 75% 18% 70% 15% 8% 68% 24% 68% 19% 7% 65% 22% 6% 65% 22% 7% 63% 22% 8% 60% 22% 9% 7% 52% 23% 14% 10% 46% 20% 18% 14% QTo what degree would you be comfortable purchasing each product on your own versus needing to talk to a professional financial advisor to understand more about the product before making a purchase decision. 5
THE TRUST RELATIONSHIP There is much debate in the industry with regards to how consumers view their relationship with the individuals who are licensed to sell investment and insurance products. The research shows that consumers see these individuals, their financial professionals, as more than just sales people. In addition, 93% report that they either completely trust or somewhat trust their advisor, 76% believe they are better off financially for working with their advisor, and 68% say they would not be where they are today without their advisor. As a result, 81% would definitely recommend their advisor to others, while 11% would likely recommend. These critical findings emphasize the high level of trust that exists between clients and their professional financial advisors. Furthermore, the perceived value of the advice received is significantly correlated with the likelihood to speak to a professional financial advisor about investment and insurance products. As such, it could be inferred that those who have a greater need for financial advice as it relates to investment and insurance products are more likely to view this advice as valuable. MY ADVISOR IS WORTH THE MONEY I PAY 75% COMPLETELY AGREE I AM BETTER OFF FINANCIALLY FOR HAVING WORKED WITH MY ADVISOR 76% COMPLETELY AGREE 17% SOMEWHAT AGREE 16% SOMEWHAT AGREE NEITHER AGREE NOR DISAGREE 4% SOMEWHAT DISAGREE 2% COMPLETELY DISAGREE 2% 6
INVESTOR INSIGHTS ON THE FINANCIAL ADVICE INDUSTRY NOVEMBER 2015 QPlease rate your level of agreement with the following statements on a scale of 1 to 10, where 10 means you completely agree and 1 means you completely disagree. Completely disagree Somewhat disagree Neither agree nor disagree Somewhat agree Completely agree I would recommend my advisor to others I trust the advice provided by my advisor Having a professional advisor helps me feel financially secure I need the advice of an advisor to reach my financial goals I would not be where I am today without the advice received from my advisor Working with my advisor has increased my understanding of finance and investments I see advisors more as advice providers than as sales people 11% 81% 14% 79% 5% 20% 69% 5% 20% 69% 6% 20% 68% 6% 22% 68% 6% 21% 67% 7
SURVEY RESULTS maintaining CHOICE II 8
ADVOCIS CONSUMER SURVEY REPORT 2015 The Canadian financial advice industry continues to evolve at an accelerated rate. One regulatory change under consideration is the banning of third party commissions, as has occurred in the United Kingdom and Australia. regulators are contemplating this change in an effort to address conflicts of interest. But what do consumers have to say on the issue?
FREEDOM TO CHOOSE In regard to maintaining choice, respondents clearly indicated that they would like to determine for themselves how they pay for financial advice. The data shows nine-in-ten consumers would prefer to have choice in the type of fees they pay their financial professional, whether an hourly fee, a percentage of their Assets Under Management, or an embedded fee. A consumer s position on the potential changes to how they compensate their advisor is impacted by whether or not the consumer feels their current compensation mode could cause a conflict of interest. For those who believe the way the advisor is compensated can result in a potential conflict of interest (30%), the change in approach to fees was seen as more likely to have a potentially positive impact on their investments. Moreover, 44% of consumers who indicated there is definitely a conflict of interest with how their professional gets paid feel that Canada definitely or probably should proceed in implementing changes. Of those consumers who feel there is no conflict of interest, 95% believe it would have a potentially negative impact on their investments, with 96% indicating the government definitely or probably should not proceed in implementing changes. Positive Impact No Impact 8% 4% QWhat impact do you believe the removal of consumer choice in how you pay for financial advice would have on your investments? Do you believe it would be a positive or negative impact? 88% Negative Impact 28% of consumers who indicated there is definitely a conflict of interest with how their professional gets paid feel the removal of consumer choice will have a positive impact on their investments. 10
INVESTOR INSIGHTS ON THE FINANCIAL ADVICE INDUSTRY NOVEMBER 2015 The majority of consumers believe their professional financial advisor is compensated via commission from the mutual funds in which they invest (81%), while 13% noted paying an annual fee. Commission-based and annual fee structures were generally considered the preferred means of compensation with 53% and 26% of consumers preferring each, respectively. Although 62% cited being informed, about fee structure, only 29% reported they were very informed. With a mean of 6.8 out of 10, consumers are not overly confident in the degree to which they are informed. HOW CONSUMERS PREFER TO PAY FOR ADVICE GOING FORWARD 81% 13% 1% Respondents who currently pay for financial advice through embedded commissions Respondents who currently pay for financial advice through an annual fee based on Assets Under Management Respondents who currently pay for financial advice through an hourly fee 53% As an ongoing 1% fixed commission of the value of the product 26% A percentage of Assets Under Management as set by your professional financial advisor 4% An hourly fee of $150-$350 QWould you prefer that the government leave the choice up to you whether or not you pay an hourly fee, a percentage of your Assets Under Management or an embedded fee? QDo you feel that Canada should proceed in implementing changes to how you do business with your professional financial advisor? No/Doesn t matter Never thought about it 4% 8% Definitely should Probably should Neutral 10% 3% 2% 88% Yes Probably should not 26% 59% Definitely should not 11
POTENTIAL CONFLICT OF INTEREST? The research examined consumer views on advisor methods of compensation and whether consumers believe conflicts of interest exist depending on fee structure 30% of consumers surveyed noted that the manner in which an advisor is paid could result in a potential conflict of interest. An additional 16% reported they had never thought about it. However, 91% of consumers stated my financial advisor has my best interests at heart and puts them ahead of their own financial gain. Additionally, those who stated they value advice from their financial advisor are more likely to indicate that there is no conflict of interest in how the professional is paid. The research indicates that consumers perceptions of the value of advice and whether they believe a potential conflict of interest exists is significantly but inversely correlated. The less a consumer believes there is a conflict; the more value they see in the advice they receive. The more conflict of interest a consumer believes is present; the less they value the advice. 17% of consumers who indicated there is a conflict of interest with how their professional gets paid prefer to pay for advice with an hourly fee of $150-$350. QHow informed do you consider yourself to be about the fees/ compensation you pay your professional financial advisor? NOT AT ALL INFORMED NOT PARTICULARLY INFORMED NEITHER INFORMED OR UNINFORMED 11% 8% 18% 6.8 VERY 29% INFORMED SOMEWHAT INFORMED 33% MEAN 1 2 3 4 5 6 7 8 9 10 12
INVESTOR INSIGHTS ON THE FINANCIAL ADVICE INDUSTRY NOVEMBER 2015 In response to issues of fee transparency, 62% cited being informed about fee structure, while only 29% reported they were very informed. With a mean of 6.8 out of 10, consumers are not overly confident in the degree to which they are informed. QPlease rate your level of agreement on the following statements on a scale of 1 to 10, where 10 means you completely agree and 1 means you completely disagree. Completely disagree Somewhat disagree Neither agree nor disagree Somewhat agree Completely agree The way advisors are paid results in a potential conflict of interest My advisor has my best interests at heart and puts them ahead of their own personal financial interests 40% 12% 12% 13% 22% 17% 74% QDo you believe the way a professional financial advisor is paid results in a potential conflict between the investor s interests and those of the professional? Definitely Probably Maybe Probably not 7% 18% 5% 26% 16% 28% Never thought about it Definitely not 13
profile OF RESPONDENTS Age Do you own or rent your home? 25 and under 26-35 1% 7% 8% Rent Own 36-45 14% 46-55 56-65 66-75 17% 25% 31% 92% Over 75 6% 0 5 10 15 20 25 30 35 Gender RRSP Contribution Yes No Female Male Contribute last year 58% 42% 38% 62% Maximize each year 26% 74% 0 20 40 60 80 100 Which of the following best describes your household structure? Widowed Divorced/ Separated Single, never married Married or co-habiting 4% 8% 6% 82% 0 20 40 60 80 100 Do you have children living with you? 60% No Yes, part time 35% Yes, full time 5% In approximately how many years do you plan on retiring or hope to retire? 46% 12% 25% 17% More than 10 years 6-10 years 2-5 years In the next 24 months How many people including yourself, currently live in your household Five or more Four Three Two One 8% 12% 15% 16% 48% 0 10 20 30 40 50 14
INVESTOR INSIGHTS ON THE FINANCIAL ADVICE INDUSTRY NOVEMBER 2015 Household Income Up to $40,000 $40,001 to $80,000 $80,001 to $100,000 $100,001 to $150,000 $150,001 to $200,000 $200,001 and over 6% 16% 16% 17% 20% 0 5 10 15 20 25 25% Education Level Less than high school 1% Some high school 2% Completed high school 13% Some college/ university 19% College diploma 24% University degree 28% Post-graduate 13% 0 5 10 15 20 25 30 Which of the following categories best describes the total value of your personal investment holdings, not including any real estate? $0 1% $1 - $10,000 2% $10,001 $50,000 8% $50,001 - $100,000 11% $100,001 - $300,000 31% $300,001 - $500,000 17% $500,001 $700,000 11% $700,001 - $1,000,000 7% $1,000,001 or more 13% 0 5 10 15 20 25 30 35 Excluding Old Age Security or Canada Pension Plan CPP, do you have a workplace retirement pension plan? 57% 43% No Yes For those with an exisiting workplace pension plan, which of the following best describes it? None 2% Another type of workplace retirement savings plan 4% A group RSP 9% A defined contribution pension plan 27% A defined benefit pension plan 58% 0 10 20 30 40 50 60 Do you currently have debt associated with any of the following? Don t currently have any debt 22% Other 1% Student loans 1% Investment loans 1% Mortgage on a cottage or 8% other residence Car loan 27% Credit card 33% Line of credit 48% Mortgage on 49% a primary residence 0 10 20 30 40 50 What percentage of your household income do you try to save or invest each month? 0% 10% 1% - 5% 16% 6% - 10% 36% 11% - 15% 13% 16% - 20% 14% 21% - 25% 4% 26% - 30% 4% More than 30% 4% 0 5 10 15 20 25 30 35 40 How would you describe your current investment style? Very conservative 9% More on the conservativeside 35% Moderate, right in the middle between conservative and aggressive 35% More on the aggressive side 18% Very aggressive 2% 0 5 10 15 20 25 30 35 15
what WE LEARNED ENGAGEMENT WITH THE ADVISOR ^^Of those surveyed, 53% have been working with their current professional financial advisor for more than 10 years, with the majority (55%) using their advisor for both insurance and investments. Of those who have worked with their professional for more than 10 years, 47% make investment decisions together with their advisor. Of those who have worked with their advisor for less than 10 years, 49% follow the advice given to them. ATTITUDES TOWARD PROFESSIONAL FINANCIAL ADVISOR ^^Consumers feel financial advisors play an important role as it relates to advice and reaching their goals. Three-quarters completely agree that working with an advisor has lead them to be better off financially. Most feel their advisor is worth the money they pay and that their advisor has their best interest at heart. Approximately eight-in-ten indicated they trust the advice they receive and would recommend their financial professional to others. On the other hand, only approximately 12% agree that the way advisors are paid results in a potential conflict of interest. PRODUCT OWNERSHIP ^^The majority of consumers own life insurance and mutual funds (75% and 70% respectively), while approximately half own segregated funds (48%), and two-in-five own personal health insurance (43%). Significantly fewer respondents noted ownership of other products. ^^The majority of consumers indicated they definitely would need to speak to a professional when it comes to purchasing investment products. Most notably annuities (76%), guaranteed income products (75%), and segregated funds (75%). Of all products measured, consumers would be most comfortable purchasing GICs or personal health insurance without the assistance of a professional; however, many still preferred to speak to a professional. COMPENSATION AND FEES ^^The majority (81%) indicated they believe their professional financial advisor is currently paid a commission for mutual funds. Going forward, just over half of respondents (53%) would prefer to pay for advice through an ongoing 1% fixed commission of the value of the product. Approximately a quarter (26%) would prefer to pay a percentage of Assets Under Management, and only 4% of consumers would prefer to pay an hourly fee of $150 to $350. 16
INVESTOR INSIGHTS ON THE FINANCIAL ADVICE INDUSTRY NOVEMBER 2015 17