The financial industry is changing. How will it affect your practice?
“Our industry is changing. There are three strong undercurrents that are reshaping our industry: technological change, a lower economic growth environment for the foreseeable future, and regulation,” explains Bernard Letendre, Head of Wealth and Asset Management, Canada and President and CEO, Manulife Investments
“These three trends have been collectively putting some downward pressure on fees, and as the fees get compressed, it’s affecting everybody across the value chain. There’s been fee compression for the manufacturers, for the dealers, and although advisors haven’t felt it yet to a large extent, there is and will be fee compression for advisors. Because it’s the customers’ money, and despite all these pressures, there’s got to be something left for them,” Letendre says. “It can’t all go on fees.”
Technology is picking stocks
Firms like Amazon, Apple and Google have altered consumers’ expectations. If we order something online one day, it can be delivered to our doorstep the next. These new expectations affect all industries, and the financial services sector is no exception.
“We’ve seen examples where digital has actually changed customer behaviours,” says Letendre. “One example is Yu'e Bao in China. In 2013, Yu'e Bao launched a money market fund online – no advisors, no distributors. Within approximately 11 months, it attracted almost US$93 billion of assets under management. It is now the biggest money market fund in the world. Somebody who thinks that technology is not going to have an impact on their practice is just putting their head in the sand.”
However, you can use new technology to your advantage. Consider integrating robo-technology into your existing practice to add convenience, efficiency and scale to your business. These online platforms can help attract younger investors. They can also enhance your business by automating portfolio construction and some low-value tasks, leaving you more time to serve your clients.
“Well over 20 years ago we were running projections for clients’ investment portfolios at eight per cent and at nine per cent. Back then it was not unusual to see mutual funds with management expense ratios [MERs] that were well over three per cent,” says Letendre. So, for example, if a portfolio was generating nine per cent and had an MER of four per cent, the client still earned five per cent. “But in an economic environment where your balanced portfolio is probably going to be generating something between five and six per cent, fees have to go down.”
Letendre notes that this new environment is not a temporary phenomenon, and it may have lasting effects. “Clearly the prevailing economic environment and what we believe to be a secular lower-growth kind of environment for probably decades to come is putting pressure on margins. We as an industry must realize that the kind of environment that we’ve operated in over the past few decades is changing in a very radical way, and we’re seeing that emerge through the popularity of lower-cost options like ETFs and passive funds, index funds. We need to get ready for the future because the world is going to look very different in five years.”
At one time, deferred sales charges were the prevailing way of paying for mutual funds in the industry, but fee-based accounts are now growing in popularity. F-class funds in those accounts don’t pay commissions to advisors and come with lower annual fees.1“The CSA has proposed a ban on deferred sales charges,
essentially accelerating the declining interest we’ve seen in the market,” says Letendre. The Canadian Securities Administrators will also be proposing many guidelines on advisor conduct in an effort to reduce conflicts of interest.2
What is the impact on advisors?
“I’ve been telling advisors for a while now that they need to rethink their business models and focus more on gamma, or holistic financial advice,” says Letendre. “With a downward pressure on fees and performance for the foreseeable future, where advisors can actually differentiate is in the field of gamma. It’s things like convincing clients to save more for retirement, staying invested, financial planning, saving for children’s education, tax planning. The things that make customers better off over and above pure investment performance.”
He says advisors should “make their value proposition less dependent on picking products and generating investment performance, because that’s going to be more and more the domain of big, efficient utilities – firms like Manulife coming out with their own managed solutions – or other options in the market, like robo-advisors.”
The importance of gamma has been proven. A 2016 study based on a Canadian survey by the Center for Interuniversity Research and Analysis of Organizations (CIRANO) reconfirmed previous studies showing the value of having financial advice. In fact, those Canadians who had used an advisor for 15 years had almost three times more assets than unadvised Canadians.3 The study established that the positive effect of advice on wealth accumulation cannot be explained by asset performance alone. Investors’ improved savings discipline and more controlled behaviour when facing market volatility, acquired through advice, play significant roles.
What can advisors do?
It starts with transparency. Make sure that you understand your clients’ circumstances to properly match products to the clients’ objectives, while keeping their risk tolerance in mind. Then explain to them the characteristics of the product and outline the associated fees.
“These are the conversations that advisors must have with clients in the spirit of full transparency. It’s important to explain to the client, ‘You’re paying fees on product x, and here’s how those fees might compare to other solutions that are available out there. Some of them are going to be cheaper, some of them are going to be more expensive, and here are pros and cons,’” explains Letendre.
For example, perhaps you have determined that compared to a cheaper passive option, a particular actively managed product provides better downside protection. If that’s the reason you are recommending the product, be sure to explain this reasoning to your client.
“So if you want to position yourself as creating great value for your clients, what better way is there than to focus on all of these things that have been demonstrated to actually create value?” says Letendre.
“It’s important to have these conversations with clients in a very open and transparent way,” says Letendre. “Lay out everything: the costs, the options, the pros, the cons, your recommendation. And then it’s up to the client to make a decision.” If you create real value and the customer sees it, your position as a trusted advisor will have been reinforced.