Digitization, Re-regulation and Professionalization for ... · 11/14/2017 · Digitization: Financial advisers facing hurricane of new technologies Power Financial Corporation –

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

1

• A new balance

• Humans at the helm

• The hurricane…

• The tsunami…

• The choppy waters…

The challenges facing financial advisers

2 Power Financial Corporation – 2017 Insurance and Investment Convention – November 14, 2017

Digitization: Financial advisers facing hurricane of new technologies


4

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

5

Specific occurrences of the hurricane in wealth management and insurance


IncumbentAdviser

Fintech

Client

IncumbentAdviser

Fintech

Client

IncumbentAdviser

Client

Fintech

6

Technologies that impact the client-adviser relationship in various ways


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


8

Legal and technological developments favouring data aggregation


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


Re-regulation: Financial advisers facing a regulatory tsunami


11

The origin of the tsunami


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


In choppy waters with clients…


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Insurers

Securities

CCMA

Credit Unions

A shakeup in the client-adviser relationship…


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%



SOURCE: BCSC study;

Edelman Trust Barometer (Canada) – Financial Industry Analyst

Misconduct that hurts the image of the profession

• Media coverage of frauds



Ponzi Portus

Mount Real

Earl Jones Fulcrum

Financial

Madoff

Norbourg Norshield

30% for all Canadian

households

Low rates for the use of advice



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)

18



Distrust/ trust

Wrongdoings

Knowledge/ lack of knowledge

Literacy

Use of advice

…raising questions about the adviser’s business model


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?


Finding a new balance


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


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.

24

101

Without advice With advice

1.58x 1.99x

2.73x

4-6 7-14 15

Number of years with financial advice

4.2x


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


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%


26

Great job, financial advisers!


27

Where do we stand?


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


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


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


• … 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


Retaking control of the helm…


Questions for the industry,

regulatory authorities

and policy makers

33

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?



How can we respect the heterogeneous nature of clients’ needs by enabling multiple business models to coexist at various price levels?


2

36

Supporting the client-adviser relationship…


How can we ensure that clients continue to have access to quality financial advice suiting their needs at a reasonable price?


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?



How can we ensure consistent service at given levels of price and expertise?



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?


2 And, finally, the sink-or-swim issue…

Supporting the client-adviser relationship…


How can we ensure that the best interest of the client is placed before that of the adviser, and communicate that effectively?

Documents

Digitization, Re-regulation and Professionalization for ... · 11/14/2017 · Digitization: Financial advisers facing hurricane of new technologies Power Financial Corporation –