who spent 20 years with the Canada Revenue Agency, says it isn’t time to sound any alarms just yet: “Objectively, Canada is in reasonably good shape internationally, and even in an enviable position compared with other G7 countries, such as Japan and the US.” He believes the government’s investments to stimulate the economy and spur growth over the long term have some validity, as long as they are properly targeted. If anything, he worries that private debt might become the bigger issue for overexposed borrowers. “There are valid reasons to keep inter- est rates down if you think it will damage the economy to raise them, but it’s sending the wrong signal to consumers to keep spending,” he says. In fact, consumer spending was up 4.8% by the third quarter of 2016, according to a report by Moneris, one of North America’s largest processors of debit and credit pay- ments. Fast food, furniture and sports apparel saw the biggest increases in year-over-year spending during the quarter. An advocate for financial literacy, O’Riordan says making sure
Canadians are more educated about their financial affairs and the economy as a whole could be a very viable way to improve Canada’s economic outlook. “I’m not naive in thinking that
By John De Goey Price is what you pay; value is what you get
As a financial advisor who has been pushing for greater transparency for nearly two decades, I can’t help but think that there are a number of accountants across the country who will be gratified by some of the recent changes to the business of giving financial advice. While way past due, these changes will finally begin to put advisors on to a more level playing field with accountants.
Until now, most people who use both sets of services are absolutely clear on how much they’re paying their accountant, but have only a vague idea of how (and how much) they are paying their financial advisor. As of January, 2017, new regulatory rules (called the second phase of the Client Relationship Model – or “CRM II”) will be in effect and will require that all client statements offer both personalized performance data and a specific (i.e. in dollar terms) quantification of how much was paid to the advisor’s firm for services rendered.
There are limits to the new reporting obligations, as they still do absolutely nothing to disclose how much products cost on client statements. Product cost is obviously a major consideration, since many people (myself included) believe that the performance of financial products often correlate negatively with their cost. In the words of Vanguard founder John Bogle: “you get what you don’t pay for”. Since clients are absolutely paying for both financial advice and financial products, it seems conspicuously incomplete to quantify and disclose one, but not the other.
A substantial percentage of investors actually think advice is free, since they never get a bill. Part of the problem, of course, is that many advisors are paid predominantly through trailing commissions (please do not allow anyone to refer to them as “trailer fees”). Expenses (including trailers) are taken from client returns with performance being reported net of those expenses. Since there are no line items to expressly disclose how much compensation is going to the advisor’s firm, there’s a certain amount of willful ignorance surrounding the price of advice. For instance, certain misconceptions might not be corrected.
There are a number of issues here and they are only just now being fully considered. These include: • The express disclosure (finally) of how much advice costs. • The lack of express disclosure of how much products cost on new statements (clients pay for both products and advice). This information is disclosed only at the point of sale; not on subsequent statements.
• The massive problem of advisor bias that has been demonstrated as a result of advisors preferring those products (often more expensive) that pay trialing commissions at the expense of other options (e.g. individual securities, exchange traded funds, index funds) which are usually cheaper. It’s just easier to sell things if you don’t have to talk about what they cost. • The continued poor understanding (read: express advisor disclosure) that product cost and investment performance correlate negatively. • The interplay between the two points above.
Today, there is fair bit of anxiety on the part of many advisors because some within their community have been circumspect on the subject of advisor compensation. The value proposition that accountants need to justify constantly will finally be out in the open for advisors, too. I suspect most will be able to justify their services, but it would be folly to expect all to emerge unscathed. How can anyone reliably claim to offer “good value” when so many of their clients don’t even know what they’re paying? By definition, value cannot be reliably determined in the absence of a known price.
Furthermore, over time, product cost will finally come to play a more prominent role in decision-making. A penny saved is a penny earned and an advisor who recommends products that cost (say) 1% less in aggregate is effectively adding $5,000 worth of value to a $500,000 account. In addition, investment counseling fees are fully deductible for taxable accounts under the Income Tax Act - section 20 (1) (bb). In contrast, traditional advisory costs (i.e. commissions) are deducted only against realized gains (most of which are capital gains that are taxed at only at a 50% inclusion rate). Both formats offer tax relief, but one format is worth about twice as much as the other.
Regulators are finally beginning to take meaningful action. My advice to accountants across the country is to do their part to help. If you have clients that have been disappointed by their current advisor and are looking for qualified help, I urge you to direct them only to those advisors who offer truly independent advice with a focus on cost minimization, overall suitability and a genuine client-first approach.
John De Goey is a Portfolio Manager with iA Securities (iAS) and the author of The Professional Financial Advisor IV. His website is:
www.johndegoey.com. The views expressed are not necessarily shared by iAS.
everyone is going to grow up to become an economist like me, but it’s so important to be informed for your own ability to save and manage money properly,” he says. “When people aren’t informed about financial affairs they tend to be myopic in terms of their life-cycle financial planning and decision-making.” Federal and provincial governments have to be just as accountable when it comes to expenditures. Are they spending wisely? Does government instil a culture of continuous process improvement? Is there a good return on investment over the long term? “These are the types of questions that must be asked,” says Thomas. Wudrick suggests a government spending review every five
years to analyze exactly what money is going out the door and if it’s being used effectively. “Just like in our own households, the government has to be accountable and the simple fact is, you can’t control debt if you can’t control spending,” he says. “At the end of the day, if you borrow money you have to pay it back even- tually — there’s no free lunch in this world.”
ROSALIND STEFANAC is a freelance writer in Toronto
MARCH 2017 | CPA MAGAZINE | 49
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