The return of the council with a capital C

First observation: The aging of the population has a strong impact on the industry. “The population is aging, which leads to a significant disbursement, and therefore a greater need for advice. However, our sales force is also aging,” said Stéphane Blanchette, Executive Vice President, Chief Compliance Officer and Chief Risk Officer of Invest Financial Services.

Almost 30% of its advisors are aged 60 and over, while this age group makes up 25% of the Canadian population. Representatives under 40 manage only 17% of assets. “Our main challenge is the transfer of business from experienced representatives to younger ones”, indicates the vice president of Investia.

To do this, the company adapted its strategies to the profile of the advisors. The older ones, those that Stéphane Blanchette affectionately calls “the eternals” have an increasing volume of business but are not thinking of retirement. “His work is his passion, his life,” sums up the manager. The company therefore encourages them to have a transition plan so that they can quickly take charge of their clients in case they have to suddenly stop their business. “We also have more passive advisers, who do little canvassing. They are our target group to attract new advisers, using them to work with them.”

One of the difficulties consists in breaking the equation according to which advisers must have more assets to maintain their standard of living, and therefore work more, estimates Stéphane Blanchette. “Serving a larger clientele does not automatically mean working more. To do this, advisers must maximize the use of technology. This is the success factor.”

Financial advice on Tik Tok

The customer profile has also changed. More and more young people are using digital platforms and robo-advisors to manage their assets themselves. “You inherit large sums. However, as the amount of money increases, the complexity of the files increases,” notes Éric Hallé, Regional Vice-President, Eastern Canada, of Dynamic Funds.

Does this generation that takes their financial advice on Tik Tok have the ability to manage their investments? “Not completely! launches the leader, recalling that only 9% of investors have the necessary knowledge to take care of their investments, according to a study by Fidelity Personal Investing.

“The advisor must have a conversation with his client about the opportunities and risks associated with alternative investments, such as small caps and cryptocurrency funds. He should not want to manage 100% of the portfolio of his clients, but rather let him manage a certain amount independently”, says Éric Hallé.

Stéphane Blanchette believes that this situation will allow the council “with a capital C” to recover its letters of nobility. “Clients must be able to find the information they need, 24 hours a day, 7 days a week, but they must also be able to rely on an adviser, regardless of the chosen investment vehicle, and in all stages of his life.”

Tommy Baltzis, president and founder of WhiteHaven, an independent investment firm, raises another demographic issue that often goes under the radar: newcomers. “We see more and more clients from different cultures. Some are not comfortable with our regulatory environment. For example, some newcomers come from countries that only believe in real estate, since this type of property cannot be taken from the government. Counselors must adapt to this reality in their advice.”

Alternative products, one way of it

Falling markets hit investors hard. By adopting a more defensive position in investments, the 60-40 distribution can no longer hold, warns Éric Hallé. Some clients have to delay their withdrawal for several years.

“In 1998, with a portfolio of fixed income invested 100% in American securities, we could expect a return of 7%. In 2015, for this same purpose, we need to introduce more than 90% in shares, with a standard deviation of more than 17”, explains the specialist.

Investors must be exposed to more volatility to hope to get a return, hence the popularity of alternative products. Since March 2021, 16 billion dollars (B$) have entered this asset category with 40 companies, 88 funds and 35 exchange-traded funds (ETFs) involved in this market, summarizes Éric Hallé.

A significant number of new products have quickly arrived on the market, such as funds focused on commodities, currencies and real estate, or event funds. Major Canadian pension funds, such as PSP and Maestri, currently hold almost 50% of their assets in alternative strategies.

Before recommending this type of investment, advisors should ask themselves about the objective of adding alternative investments to portfolios, emphasizes Éric Hallé. Whether for diversification, protection or to generate returns, the key element is to know why we use it, I believe.

Stéphane Blanchette, for his part, sees alternative investments as an opportunity to review the control processes that govern the distribution of these products. “This forces our management and supervision team to look for these skills. I believe, however, that the obligation to know your product represents an additional burden due to the due diligence that the distributor must perform on certain products and suppliers.

Greener investments

In times of geopolitical uncertainty and volatility, the addition of ESG criteria in investments adds additional complexity to obtain returns, considers Tommy Baltzis.

Éric Hallé observes that the social criterion tends to take on more importance because of the war in Ukraine compared to the environmental criterion, which had taken up a lot of space not long after the energy transition. Faced with the sometimes exaggerated influence of external factors in the definition of ESG criteria, he considers it important “to establish a process to ensure that we are not distracted by daily events”, he underlines.

In evaluating ESG performance, it advocates an active and inclusive approach, which does not stop at the score assigned by the rating agencies. “We have to do our own due diligence to integrate the companies that invest to improve their current position, which have good cash flow and which offer the opportunity to increase their dividend. »

However, the imposition of ESG criteria should not be accompanied by additional supervision depending on the client’s profile, believes Stéphane Blanchette. “As long as the approach continues to be based on goodwill, it is positive. The day it becomes a regulatory requirement, the distribution will be more impacted.”

A close look at regulatory aspects

Asked about the reform of deferred acquisition costs (DAF), which will be abolished on June 1, the participants in the round table expressed reservations. Tommy Baltzis considers that small clients will be the big losers of the reform, because advisers risk having less time to devote to them. He also sees the reform as a problem for the next generation, because young people could be less tempted to pursue a career in the industry.

With this reform, advisers will seek remuneration on products other than savings, believes Stéphane Blanchette. “This could suggest that the consumer with a smaller wallet will be less served. One of the ways for advisers, he says, is to automate even access to basic information for some clients to focus on finding other sources of income .

Among other challenges on the radar, Éric Hallé mentions the Customer-Advisor Relationship Model (MRCC3) that will succeed CRM2, a set of rules that require greater transparency regarding the cost and performance of accounts the customers. The impact of customer-centric reforms is also of concern to Stéphane Blanchette. He awaits with interest the results of the first rounds of reviews of the new self-regulatory organization (SRO) scheduled for this fall, before the start of the transition phase that will begin on the January, as well as its interpretation of the obligations of membership.

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