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Digitization, Re-regulation and Professionalization for ... · 11/14/2017 · Digitization:...
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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, 2017
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• A new balance
• Humans at the helm
• The hurricane…
• The tsunami…
• The choppy waters…
The challenges facing financial advisers
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Digitization: Financial advisers facing hurricane of new technologies
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Five factors fostering the development of the hurricane
Power Financial Corporation – 2017 Insurance and Investment Convention – November 14, 2017
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
Collaboration/democratization
in the validation of data • Distributed ledger technology
(blockchain)
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
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Specific occurrences of the hurricane in wealth management and insurance
Power Financial Corporation – 2017 Insurance and Investment Convention – November 14, 2017
IncumbentAdviser
Fintech
Client
IncumbentAdviser
Fintech
Client
IncumbentAdviser
Client
Fintech
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Technologies that impact the client-adviser relationship in various ways
Power Financial Corporation – 2017 Insurance and Investment Convention – November 14, 2017
B C 2 B 2 B B 2 B 2 C
New products
New portfolios
New analytical techniques • Big data
Artificial intelligence
Digitization changes every aspect of the job of the financial adviser
New management support functionalities • Reporting/disclosure
• Portfolio building
• Accounting
• Compliance
• Data aggregation
Product/portfolio supply • Platforms, new ecosystems
• Disintermediation
New client expectations • Functionalities
• Access
• Customization New procurement, communications and distribution methods • Social networks, omnichannel
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Legal and technological developments favouring data aggregation
Power Financial Corporation – 2017 Insurance and Investment Convention – November 14, 2017
European Union: • PSD 2: Payment Services Directive
(January 2018)
• GDPR: General Data Protection
Regulation (May 2018)
United Kingdom: • Open Banking Standard
(January 2018)
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)
Now:
Advisers have the initiative… and the power
Data aggregation alone has the potential to transform the client-adviser relationship
In the future:
Clients control their data… they have the power
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Re-regulation: Financial advisers facing a regulatory tsunami
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The origin of the tsunami
Power Financial Corporation – 2017 Insurance and Investment Convention – November 14, 2017
Global financial
crisis
• Regulations favouring
financial system stability
Better consumer
protection
• Regulations on
professional conduct
Unacceptable market
behaviours
• Regulations on
market conduct
Transparency • CRM1, CRM2
• Disclosure at point of sale
• CRM3?
The activism of regulatory authorities
Enhancement of the obligations of registrants • Know your client
• Know your products
• Suitability
• Proficiency
New regulatory bodies • (Pan-Canadian) Capital Markets
Regulatory Authority
• Ontario: Financial Services Regulatory Authority
Increased oversight of banks • Financial Consumer Agency
of Canada
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
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In choppy waters with clients…
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Insurers
Securities
CCMA
Credit Unions
A shakeup in the client-adviser relationship…
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Bank
Products Insurance
Products
MFDA
CSF
AMF
IQPF
OSFI
FCAC
CFA
CSA CCIR
CAsD
Bank of
Canada
APCSF
ETFs
Mutual
Funds
Brokers
Chartered
Banks
CDPSF IIROC
IIAC
Group Savings
Representatives
Certificates
of Deposit
Segregated
Funds
Insurance
Brokers
Lack of knowledge
• Low rate of financial literacy
42% • Perception of clients:
a complex, confusing world
SOURCE: Boisclair, Lusardi, and Michaud, “Financial Literacy and
Retirement Planning in Canada,” Journal of Pension Economics and
Finance, December 2015, pp .1-20
Account
Director
ON-OFF distrust
• Satisfaction among clients who have an adviser
83% • Distrust among those
who do not have one
41%
A shakeup in the client-adviser relationship…
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SOURCE: BCSC study;
Edelman Trust Barometer (Canada) – Financial Industry Analyst
Misconduct that hurts the image of the profession
• Media coverage of frauds
A shakeup in the client-adviser relationship…
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Ponzi Portus
Mount Real
Earl Jones Fulcrum
Financial
Madoff
Norbourg Norshield
30% for all Canadian
households
Low rates for the use of advice
A shakeup in the client-adviser relationship…
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27% for households that are not
prepared for retirement
49% for households that are
prepared for retirement
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)
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A shakeup in the client-adviser relationship…
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Distrust/ trust
Wrongdoings
Knowledge/ lack of knowledge
Literacy
Use of advice
…raising questions about the adviser’s business model
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The challenges facing financial advisers
Compliance • Increasingly numerous and complex
standards and regulations
Relevance (of the adviser) • Disintermediation of the adviser
• Client expectations: cost vs. benefit of advice
Efficiency and scale • Increasing costs / decreasing unit payments
Technology • Competition from or complementarity
of automated (“robo”) advisers?
What business model? • Growing importance of the brand
• Who should take responsibility for compliance and technology investments – the adviser or the organization?
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Finding a new balance
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Getting back to basics: What financial advice really is
Investment policy
Beta β • Asset allocation, e.g.
– How much exposure to market?
– How many local vs. international assets?
• Investment style, e.g. – Active or passive
management?
– Suitability of investments vs. risk profile?
Investment behaviour
Gamma γ • 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,” 2012
Investment management
Alpha α • “Stock picking” or
“mutual fund picking,” e.g. – Which stocks?
– Which funds?
• Market timing
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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
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. 69-94.
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101
Without advice With advice
1.58x 1.99x
2.73x
4-6 7-14 15
Number of years with financial advice
4.2x
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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
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Financial advice has positive social and economic impacts
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With financial advice Without financial advice
Investments
Deposits
The majority (62%) of Canadians’ financial wealth is invested with advice
SOURCE: Strategic Insight − 2017 Investor Economics Household Balance Sheet Report−Canada
Total: $4.2T Year-end 2016
$2.6T
$1.6T
85% 36%
15%
64%
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Great job, financial advisers!
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Where do we stand?
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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
1. Become aware of and realize what financial advice really is:
Now, what needs to be done to deal with the hurricane, the tsunami and the choppy waters
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
1
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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
Now, what needs to be done to deal with the hurricane, the tsunami and the choppy waters
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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
Now, what needs to be done to deal with the hurricane, the tsunami and the choppy waters 3
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• … as a teacher
– In the face of often weak financial literacy, communicate concepts effectively
4. Faced with choppy waters, build on expertise…
Now, what needs to be done to deal with the hurricane, the tsunami and the choppy waters 4
• … in technology
– Means of communication, management and portfolio-building solutions, automated accounting and compliance
• … as a coach
– Emotional intelligence
• … in financial solutions
– Products, portfolios, planning
5 5. …and teamwork:
• Taxation, estate law
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Retaking control of the helm…
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Questions for the industry,
regulatory authorities
and policy makers
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2 Supporting the client-adviser relationship…
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?
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2 Supporting the client-adviser relationship…
How can we respect the heterogeneous nature of clients’ needs by enabling multiple business models to coexist at various price levels?
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2
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Supporting the client-adviser relationship…
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How can we ensure that clients continue to have access to quality financial advice suiting their needs at a reasonable price?
2 Supporting the client-adviser relationship…
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?
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2 Supporting the client-adviser relationship…
How can we ensure consistent service at given levels of price and expertise?
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2 Supporting the client-adviser relationship…
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?
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2 And, finally, the sink-or-swim issue…
Supporting the client-adviser relationship…
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How can we ensure that the best interest of the client is placed before that of the adviser, and communicate that effectively?