At Efficient Wealth Management, we have an important business challenge and I thought describing it would be a very effective way for you to learn the inherent difficulty in finding solid independent investment advice and financial planning. EWM is an Advice for a Fee financial planner. As such, we wish to remain completely unconnected to any company selling financial products. Be those insurance policies, mutual funds, stocks and bonds, etc. Many clients first approach us because they are unhappy with their current investment situation. Sure, they have concerns about when they can retire, how much should they be saving, or if they are minimizing their tax liability each year, but invariably, they are very concerned about what investments they have and what they should have. It is this need to discuss their investments that lead to our challenge.
To offer advice on investment security in Ontario (for all effective purposes, this means all of Canada as well), you must be registered. An unapproved person cannot comment on a specific security, to a specific individual, since it might lead to a buy or a sale of the investment. You must be registered to give ADVICE about a specific investment. In Ontario (Canada) there is no securities registration available for Advice Only, so in most cases, your advisor must be prepared to buy and sell as well. This situation is aggravated by your advisor needing to register in a certain category of securities or services.
‘Silos’ is the description I have for the vertical sales channels in the investment world through which advisors are registered. In the simplest terms, at the retail level, let’s consider there to be four silos with four regulators: Mutual funds (the Mutual Funds Dealer Association – MFDA), Brokerage (the Investment Industry Regulatory Organization of Canada – IIROC), Insurance (the provincial insurance regulator itself – FSCO, AMF, ATBF, FIC, etc.) and Portfolio Managers (the provincial regulator itself – OSC, AMF, ASC, BCSC, etc.). Your advisor must belong to a company or organization that is in itself registered with the fore mentioned regulators. Your advisor has a duty to their sponsor before and above their duty to you.
The above-noted regulators are the only path for registration. You may have noted that three of the four regulators are thus regulating “Salespersons”. So again, in order to be able to discuss investment security with you, the advisor must be registered to sell you something. The only exception to this is a portfolio manager, who is not registered to sell to you, he is approved to take over your assets and do what he believes is best for you. In other words, he need not help you with advice about a particular security, since he is going to buy it for you.
Since traditionally, portfolio managers are only available to those households with assets in excess of one million dollars to invest, the majority of households in this country get ALL their investment advice from SALESPERSONS. To make matters worse, because of the siloing, the salesperson’s advice is only able to consider the security types they are registered for within these self-containing channels. A mutual fund registration does not permit the sale of stocks and bonds. A broker cannot offer discretionary services in the same manner as a portfolio manager. To sell life insurance you need to be licensed to sell by the insurance regulator. Why is all this important? Well, if you are speaking to a financial planner that is licensed as an insurance representative, do not be surprised that the ideal solution for your situation is an insurance product. It is what he is licensed to sell. If talking to a broker about your financial planning needs, do not be surprised that he does not suggest discretionary money management. He is licensed otherwise. And do not expect to be passed easily to a different advisor in a different silo, since controlling the client is the source of the revenue to the advisor.
Since you have less than one million to invest, where does this leave you and us at EWM? You have concerns about taxes, estate planning, the health of your portfolio, your retirement savings and your pension. You look for a financial planner and find that the term is used in all three retail channels accessible to you. Understanding the salesperson quandary, you may also consider a fee-only planner like EWM who is proudly not registered to provide security-specific advice.
The mutual fund registered advisor, the “financial planner”, can thus comment on any and all mutual funds sold in Canada, but not any other securities. The MFDA recognizes that there are non-security activities that are part of financial planning but discourages financial planning beyond buying and selling related matters by not allowing such services to be charged for. Insurance agents, as the “financial planner”, have a broader hand in providing non-security related financial planning, since the Insurance regulators allow financial plans to be charged for. However, non-insurance related products like mutual funds, stocks, bonds and ETFs cannot be discussed. Brokers, the IIROC “financial planner”, on the other hand, may discuss, stocks, bonds, ETFs and mutual funds but not insurance products unless they are also licensed. IIROC even anticipates that its’ brokers might need to purchase the services of a financial planner. Thus, brokers have good breadth compared to mutual fund and insurance only advisors. However, all three suffer three fatal flaws. 1) Their primary responsibility is to their sponsor, not their client; 2) Their sponsor is a sales organization, and 3) Their test of suitability of the investment for you does not preclude them from seeking the best for them as well.
We must now surmount our challenge at EWM. Your Advice for a Fee or your Fee-only planner cannot discuss any type of individual security with you, even if fully qualified to do so, due to lack of registration. They may certainly handle very well all your non-security related matters and they certainly can discuss with you the pros and cons of being in one of the silos. They can certainly discuss asset allocation and security classes but must refrain from discussing individual securities. Our solution has always been to manage the relationship with the registered securities person to ascertain all the advice you need on individual securities, without exposure to a sales process, ensuring you obtain investments good for you, not them and do so at a price reflective of the value received.
At EWM, we go one step further. After completion of a complete financial plan, for clients with $100,000 or more, we access for you the services of a Portfolio Manager, who is not in sales and by law must put your interest above their own. Sounds like a winning combination doesn’t it.