The recent 2019 Ontario Budget finally introduced a proposal that is long overdue – formally regulating the terms financial planner and financial adviser. While specific details about proficiency standards are yet to come, most of us in the financial advice and investment industry are eager to have a valid framework in place as soon as possible.
There is a difference between a financial adviser and a financial planner. A financial adviser typically helps clients manage their investments, while a financial planner helps clients identify and meet major goals, such as retiring comfortably or paying for a child’s education. While appropriate licensing is required for someone to advise in the purchase or sale of a mutual fund, a stock, or an insurance policy, anyone can offer general financial advice without any evidence of qualification. As a result, many investors can fall prey to a regular stream of frauds and incompetent advisers.
For the past few years, our industry has been focused on a few key issues, such as the fees investors pay. While regulators have concerns with respect to their transparency, many players in the industry seem to be focused on whether or not they are too high in terms of their fees. Both of these perspectives are important, but miss the point.
In my view, the big issue is whether or not the advice is qualified, competent, and valuable. How one pays for it, and what one pays for it, are secondary.
It’s critical that investors are able to tell financial advisers apart, first to help protect themselves from fraudsters, and second, to help guide them to properly qualified practitioners. You don’t have to spend too long on Google or reading newspapers to find stories about investors being scammed out of their money. But regulating the use of financial adviser and financial planner titles is a simple and effective first line of defence against criminals. It’s like locking your doors and closing your windows.
Today, Canadians are facing a retirement-income crisis. Here’s what is driving the severity and urgency of the problem:
- The fastest growing segment of the population is baby boomers. By 2024, one in five Canadians will be over 65.
- Fewer than 23 per cent of tax filers made an RRSP contribution in 2016, according to the most recent data from Statistics Canada. The result is that there is nearly $1-trillion in unused RRSP contribution room available.
- While TFSAs are popular, they are used as much for short-term savings as for long term, with 47 cents in withdrawals for every $1 contributed.
According to MNP, a leading consulting firm for accounting, tax and business, 46 per cent of Canadians are within $200 of financial insolvency.
The fact is more Canadians are reaching retirement age faster than we realize. And they are getting there with less money put aside in order to live longer than they expect to. There is a sense here of burning the candle at both ends.
While many things can impact your economic reality, it is clear that financial illiteracy is widespread. Most Canadians are really passengers in their own financial lives and are headed for disaster. When they do decide to grab the wheel, most of them need help, advice, and assistance to get back on track. When they seek the help of a professional, they deserve to get qualified, experienced advice. Indeed, a great adviser can make an enormous difference.
But lousy ones can derail us in disastrous ways. An important aspect of my work is something I refer to as “forensic financial planning.” It involves finding and correcting the damage that bad advice has done. Think of dentists who must fix problems other dentists have created. But then not everyone can be a dentist. My industry is different since, until now, anyone could hang a shingle.
What kind of mistakes happen? Here are four big ones:
- The incorrect use of leverage.
- Over-allocating to securities that are high-risk.
- Buying mutual funds that are too expensive and proprietary.
- The excessive use of whole life insurance.
And this is only the tip of the iceberg. Often the salesperson is well meaning, but not particularly competent. Let’s hope that this new initiative from the Ontario government makes it easier for clients/consumers to find qualified professionals.