Primerica, Inc. has commissioned an economic consultant to produce a report examining the potential impact regulation has on the financial services industry’s ability to provide advice to middle-class and lower-class earners. Entitled Balancing Act, Enhancing Regulation without Compromising Financial Access in Canada, the report finds that some initiatives reduce risk while others reduce choice and come at a high cost to middle-income investors.
“Policymakers should seize the unique opportunity to learn from other countries where regulatory barriers turned advice into a privilege for high-net-worth households,” the company writes in a statement announcing the publication of the report. “Researched and written by Amy Crews Cutts, PhD and economic consultant to Primerica, the report examines the potential impact of regulations on the financial services industry’s ability to continue to provide advice to the middle class,” they add. “Costly compliance and licensing requirements and compensation restrictions can come at a high cost to investors and disproportionately impact middle-income households.”
Cutts adds: “the extensive research laid out in this report shows that these types of proposals have the potential to hinder the ability of middle-income households to build wealth,” she says, “the opposite outcome regulators hope to achieve.”
The whitepaper further examines research showing that those who seek advice are better at saving, managing volatile markets and building wealth. “Over the long term, those with advisors have larger gains than otherwise similar non-advised Canadians,” they write. It also looks at the amount of money currently sitting in savings accounts. “Absent financial advice, Canadian households will continue to over-save in low return accounts instead of investing in accounts with potentially higher returns.” They add that robo-advice is not for everyone, with surveys showing that many are not trusted or particularly liked by investors.
Looking extensively at the experience and fallout of similar regulations put in place in the United Kingdom – these aimed to improve transparency, advisor quality and suitability standards – they add that current deliberations in Canada regarding advisor commissions similarly risk limiting access to advice.
In the UK they say reforms have resulted in a 37 per cent reduction in the number of retail financial advisors, 178 retail investment advisory firms have closed up shop, onboarding new clients has become more expensive and firms have increased the minimum portfolio sizes they are willing to accept when serving clients. Regulators there have “noted the advice gap as an unfortunate outcome, suggesting that low and moderate-wealth consumers could be served by robo-advisors,” they write.
The research also shows that fees have increased. There is also a significant disconnect between what people are willing to pay for advice and what those professionals are actually charging.
They conclude saying, in Canada, proposals to ban embedded commission in mutual funds and segregated funds are celebrated as a win for consumers but add that the market and other regulatory requirements were already eroding demand for the product. “At the rate demand was falling, DSC (deferred sales charge) mutual funds would likely have been eliminated by market competition within a few short years, without regulation,” they write. “Allowing product manufacturers and distributors flexibility in compensation is important for encouraging innovation and reducing the advice gap.”
