By Tom Bradley
In the fourth installment of our series marking our 5th anniversary, we look at five industry practices that need to evolve. Desperately.
The wealth management industry has changed a lot since we started Steadyhand five years ago. The banks have strengthened their hold on asset management, low-cost ETFs and high-cost structured products have become more prominent (and numerous) and lower-volatility income products are now the big seller. Some of the changes have been good for client returns, while others were more attuned to company profits.
While our birthday blogs have been mostly about reflecting back, I’m going to look both ways in this post by highlighting five industry practices that have not evolved enough over the last five years and desperately need to in the next five.
The wealth management industry is great at pitching clients on how a new product or fund is going to enhance returns. Unfortunately, few firms then tell their clients how it worked out. Or what fee and commission they paid? Or for that matter, how the glorious new product fit into the client’s long-term plan.
If financial literacy and investment behavior is going to improve, client reporting has to get better. (Note: I’m quite confident we’ll see improvement here because it can’t get worse.)
2. No advice, no pay
Canada is an expensive place to have your money managed. Investors have failed to benefit from the scale that has resulted from unrelenting industry consolidation. Representatives of the industry will point out that comparisons to other countries are unfair because Canadian mutual fund fees have advice charges built into them, whereas other countries don’t. It’s like comparing apples to oranges, they say.
This is true, but the industry deserves what it gets on the fee issue. It has provided little or no transparency around who is getting paid for what. As a result, capable advisors who earn their annual 1% are being paid the same as their brethren who are doing nothing more than selling product.
What needs to change? Clients who are being charged 1% or more per year (via on-going commissions or trailer fees) for indifferent service and no advice need to be made aware. Compensation must be clearly visible, as opposed to being embedded in the MER (management expense ratio) of a fund or not reported at all. Australia and the U.K. are moving in this direction and it’s time we joined them.
3. One set of rules
In the last five years, the lines continued to blur between products sold by the banks, insurance companies, investment dealers and investment counselors. Certainly it all looks the same to the client. They don’t see much difference between what’s offered and who is regulating their investments. This would be fine, except that the oversight is very uneven. For instance, the level of scrutiny afforded Principal Protected Notes (PPNs) and hedge funds pales in comparison to what a mutual fund goes through. In the bank branches, for instance, there are claims made about PPNs that couldn’t be made anywhere else.
The regulators need to catch up to the product proliferation and make some progress towards regulating wealth management as the one big industry that it is.
4. RRSP transfers
It’s a small thing perhaps, but the industry has got to clean up its act when it comes to transferring registered assets. Firms have proven they can process in-coming money in minutes, but claim to need weeks to transfer it out. When asked why it takes so long, they say it’s “prevailing industry practice”. That may be so, but there are a handful of firms that turnaround transfers in a day or two, while the big players keep the money on their books for 3-4 weeks and leave their departing clients in limbo.
On this one, I’d be happy to get the ball rolling with a proposal for the regulators to consider: I so move that a financial institution’s ‘transfer-out’ time cannot exceed its ‘transfer-in’ time.
5. Less short term
I serve on a couple of institutional investment committees. When managers report to us, I’m amazed how much time is spent reviewing short-term returns, sometimes with pages of detailed attribution. “You had a good quarter because your energy holdings relative to the S&P/TSX Composite Index were overweighted oil and underweighted natural gas.” UGH! It may be useful for day traders, but for long-term investors? Come on.
Even though the most commonly used words in the wealth management industry are ‘long term’, not enough advisors and managers walk the talk. They either focus their communication on near-term stuff (corporate earnings, returns, trading strategies) or even worse, vacillate between short and long-term, depending on what looks better or is more exciting.
Advisors and managers need to ignore the short-term wins (and losses) and stick to longer-term strategies, performance and wealth creation. If they want their clients to be effective investors, they themselves can’t just be disciplined when it’s convenient to do so.
It depends what side of the bed I get up on as to whether I’m optimistic or discouraged about the industry’s direction. But sleeping habits aside, I do think there will be progress on the issues I’ve raised. Some of it will result from new regulation and some will come from client and competitive pressures. I would prefer the latter, but gladly take the former.