The Future of Financial Advice

One thing that many observers notice about financial services is that the evolutionary process is slow to change.  Glacially slow.  As a simple illustration, Ontario Securities Commission (OSC) Commissioner Glorianne Stromberg wrote a report in 1995 (!) where she clearly indicated that embedded commissions in mutual funds – both in the form of immediate deferred sale charge (DSC) commissions and ongoing trailing commissions – caused advisor bias and should be eliminated.  It wasn’t until the summer of 2017 that the Canadian Securities Administrators (CSA) released a policy paper that acknowledged as much.  Even then, the CSA paper recommended the abolition of DSC, but not trailers.  For those keeping score, that’s an entire generation to acknowledge something that was strongly suspected.  Along the way, there were countless workshops, white papers that invited industry commentary, town hall meetings and legal revisions.  The CSA also waited until the second decade of the new millennium to commission two reports that actually gathered (wait for it…) real evidence regarding the effects of embedded compensation.


The challenge in writing about what the future may hold, therefore, is in timing.  Speaking personally, I had expected the first steps of embedded compensation being eliminated would have been taken around the year 2000 with full implementation a few years after that.  I began writing a book in January 2001 which dealt with that topic (among others) and was fearful that it might be dated by the time it was released (autumn, 2003).


The financial services industry lives in the past.  The stakeholders do everything they can to preserve the status quo based on dated business models that are predicated on what worked in the past.  Part of why they do this is that old business models were more lucrative than they were meritorious.  The industry advocates for policies, processes and products that maximize revenues and profit margins.  That’s not surprising; every industry does that.  The difference is that the financial services industry is supposed to protect the legitimate interests of their valued clients.  The reality is that those valued clients are also the source of industry profits.  In short, the industry takes pains to appear to be sympathetic to ordinary investors while actually being determined to protect their margins.  Don’t listen to what the industry says; watch what the industry does.  The lack of real initiative noted above speaks volumes. As the saying goes: “when all is said and done, more will be said than done”.



In the aftermath of the novel Coronavirus pandemic, people the world over have taken to referring to the “new normal”.  That’s prudent and frankly, necessary.  The financial services industry, however, looks backward; not forward.  Stated differently, the financial services industry will almost certainly act as though nothing has really changed.  When there’s evidence that the world has changed and that that change is detrimental to the financial services industry’s interests, the obvious industry response will be to deny the evidence.  The industry is dedicated to shifting our focus to feel-good vibes, because optimism is good for business.  It’s a sleight of hand that I call “bullshift, where the industry manipulates their clients’ collective viewpoint to the glass being half full, no matter how empty it actually is.


Whether people want to admit it or not, things have changed.  This is not an article about broad macro-level public policy or economic trends and indicators, but the industry’s reaction to those considerations are vital to our consideration of what the future might hold.  For instance, there are competing opinions about what might be in store for inflation in the next few years, but there are many (myself included) who think it’ll be subdued to the point that a more realistic threat might be one of prolonged deflation.  There is no debate about the future of interest rates, however.  They will almost certainly be extremely low for the next generation.  With the context established, let’s look into the future.

Lower returns

There will be cognitive dissonance all around (the industry does not want people to think about anemic returns over the remainder of their investing lives), so the industry will act as though past returns will be a reasonable facsimile of future returns and many of their clients will believe them because they want to.  For investors, it’s called “motivated reasoning”.  It’s really just bullshift.  Here’s the reality: the historical equity risk premium is about 5%.  Stated differently, long-term returns for stocks have consistently been about 5% higher than long-term returns for bonds.  As I write this in the summer of 2020, the ten-year government of Canada bond yields less than 1%.  Let’s round up and extrapolate.  How many people do you know who have financial plans that project bond returns at 1% and stock returns at 6%?  A portfolio that is 50% invested in each would yield about 3.5% over the long run.  The reality of lower returns is the great battleground for the industry.  Fair-minded people will make recommendations based on low expected future returns.  Those who are less fair (and / or less thoughtful) will happily pretend that the returns of the past will persist.


Lower fees

Here’s where the rubber hits the road.  Lower fees applies to BOTH products AND advice.  For a generation now, low-cost products have been available and many advisors and discount brokerages promote them as a legitimate value add.  John Bogle is known for having quipped that, when it comes to costs, “you get what you don’t pay for”.  In essence, the reality of both low returns and the debilitating impact of high cost will tag team to create a sea-change toward lower cost products AND services.  Until now, the full-service industry has resisted fairly priced advice.  Advisory fees have been high because the market has been able to bear it.  That circumstance is not long for this world.  My guess is that advisors will need to lower their fees by 20% to 30% in order to remain competitive.


Fewer advisors

One of the spin-offs from the move to lower fees is that marginal advisors will likely be forced out of business.  Lower margins means smaller clients will be forced to exit the space the same way mom and pop stores end up closing shortly after Wal Mart comes to town. To compound and accelerate this trend, many advisors will also be forced to exit the industry due to higher proficiency standards that make it difficult for those of modest intelligence to get by.  Last, greater emphasis on transparency and disclosure will make it nearly impossible for some (mostly in the mutual fund world) to make promises or offer assurances that are less than robust.


Difficult to get personal advice

Given the above, there will be an imperative on larger accounts.  There are already some bank-owned brokerage firms that will not allow advisors to collect fees on household accounts with less than $250,000 in investable assets.  That may be the thin edge of the wedge, but if an account is under $100,000, it will become difficult for some investors to find an advisor who will take them.  The industry needs to be profitable and there’s only so much room for “loss leader” clients who may or may not prove to be profitable down the road.  Most people in that snack bracket will need to decide between acting as their own advisor, tolerating whatever advice and restricted products they might get at the local bank branch or some form of robo-advice.  Traditional, qualified human advice will be out of their reach unless and until they can get their account values up to the point where they are worth the while of the advisory firms who can actually help.





Steady acceptance of ESG / SRI mandates

For many years, it was institutional investors (endowments, universities, family offices, pension funds) who allocated a sleeve of their investments to some form of either Environmental, Social or Governance approach or some other form of Socially Responsible Investing.  Slowly, these products are becoming mainstream and gaining traction in the retail space.  There is little compelling evidence that using ESG/ SRI products does much to move the needle in either direction regarding performance, so it needs to be noted that the driver of this shift is the simple fact that people want to vote their conscience with their portfolios.


Increased use of structured products for income

Given the paltry returns that one might expect from bonds and GICs, there will be a few people who will put wine in their water by trying to pass off dividend-paying stocks as a form of “income”.  It is not.  Dividend-paying stocks are equities.  There are a few synthetic products that are considered to be (i.e. referenced on account documents as) income, simply because they offer principle protection.  Worst case scenario is you get your money back.  Best case, you can get mid to high single digit returns if the underlying equity basket with options does well.  Given the choice between a guaranteed 1% and the risk of getting anywhere between 0% and 6%, more and more people will take the risk, provided there really is principle protection and liquidity as part of the deal.


Elimination of all embedded compensation

One can hope.  This is something that many would have expected to have happened at least 10 years ago.  Maybe 10 years from now, the industry will get around to doing what should have been done long, long ago.


More advisors will become PMs

As the financial services industry professionalizes, there will be an accelerated move on the part of IIROC (i.e., securities) advisors to become Portfolio Managers (PMs) and act as fiduciaries by exercising discretion on their clients’ behalf.  The industry likes it, because registrants can be far nimbler and more purposeful in their management of client portfolios, which will be subject to a form of mass customization.  As someone who has been a PM for over a decade, I can vouch for the efficacy of the format.  Once you’ve worked as a PM, you’re left to wonder how you ever functioned before that.


No one knows what the future holds with any certainty.  However, if the past is any guide, the industry will continue to move in the “right direction”, but at a painfully slow pace.  The future, I believe, will be friendlier than the present.  That’s the good news.  The bad news is that many retirees reading this likely won’t even be alive anymore by the time some of these things have actually come to pass.


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The information contained herein has been provided for information purposes only.  The information has been drawn from sources believed to be reliable.  Graphs, charts and other numbers are used for illustrative purposes only and do not reflect future values or future performance of any investment.  The information does not provide financial, legal, tax or investment advice.  Particular investment, tax, or trading strategies should be evaluated relative to each individual’s objectives and risk tolerance.  This does not constitute a recommendation or solicitation to buy or sell securities of any kind. Market conditions may change which may impact the information contained in this document.  Wellington-Altus Private Wealth Inc. (WAPW) does not guarantee the accuracy or completeness of the information contained herein, nor does WAPW assume any liability for any loss that may result from the reliance by any person upon any such information or opinions.  Before acting on any of the above, please contact me for individual financial advice based on your personal circumstances.  WAPW is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.