In 2009, there were net repurchases of 1.75 billion of mutual funds. This meant there were thousands of investors who were not able to face volatility. Why were these investors fully invested in the market? These investors would be surprised to learn that current regulations are preventing them from receiving a financial advice that is objective.
I was in my car and I was listening to CBC radio. There is an interview with an investor who cries over the radio waves saying she had suffered a large loss in her investments. Since these investments were in a RRIF, she was complaining the government was forcing her to realize capital losses by forcing her to make a minimum withdrawal under her RRIF. The problem was not with the advice she received but with the Income Tax Law applying to registered money.
First what kind of advice did she receive? There should have been 1 to 3 years of liquidities in her investments to help her weather volatility of the market. However she was fully invested at 100% in mutual funds and in the market. Such mutual funds did not offer side investments that could create thee liquidities needed to provide the income when the market drops down. It was clear nobody had ever spoken to her about life annuity, segregated funds with an income guarantee or segregated funds with side guaranteed investments where liquidities could be invested under the same product. As a result, under this type of segregated fund product, it is possible to direct that all withdrawals come from the guaranteed portion of the investments where the liquidity portion of the portfolio resides.
Why was this informationnot available would be a great surprise to this client? The advice given to investors are not based on objectivity but on what the advisor is allowed to sell. In this case, the banker was only allowed to sell mutual funds and this is all that was presented to the investor.
FINANCIAL ADVICE IS GIVEN NOT BASED ON THE NEEDS OF THE CLIENT BUT IS BASED ON THE TYPE OF LICENSE THAT IS HELD BY THE ADVISOR!
Let us look at the case of a customer who I met with an advisor to explain to this customer the pros and cons of a segregated funds with an income guarantee. This advisor had a valid license to sell mutual funds and insurance and we can say that any recommendation made by him was not going to be influenced by the products he could sell. He was allowed to sell them all. We made a recommendation based on a strategy of safeguarding the capital and income. The client was taking his retirement and it was logic to adopt such a strategy. The customer spoke with his banker. The banker destroyed our recommendation by stating the price of the guarantees of the segregated funds were too high. He convinced the client the guarantees were not worth anything since it was proven that over a 10 years period, your investment will be always be worth more than the capital that was invested (This is a lie. This is the equivalent to say the return of the mutual funds over 10 years is guaranteed. This is illegal). The customer believed his banker. He believed in his objectivity. Unfortunately, he did not know his banker was only allowed to sell mutual funds as he did not have a licence to sell insurance. Could he be objective with our recommendation? Absolutely not. Will the banker refund the losses of the client? Absolutely not.
It would be easy to put the entire fault on the banks. Unfortunately the insurance industry, the government and the regulators have their share of responsibility. The fact is the insurance companies, with the support of the government, wanting to protect their share of the market prevents the banks from recommending objective solutions by imposing limits on the products they can offer to their customers. It is hard to say this because I worked in the insurance industry. But I believe the interest of the public passes before mine. The right of the investors to receive objective advice must be defended.
It is thus obvious regulations must change. We must move from the regulating of product selling to regulating the service offered. In Quebec, we are partly there. We already regulate a service and it is financial planning. We must now move away from licensing the selling of mutual funds and the selling of life insurance. These licenses must be replaced by a license based on service and the ability to offer such service. There should therefore be a license for wealth accumulation and retirement planning and a license for estate preservation. By regulating service and not the product offering, the investor will know that the products recommended will be suitable to the service he is seeking. He will also easily know the competencies of the advisor and in which domain the advisor can practice.
These changes become urgent considering the disappearance of the 100% guarantee and even the 75% guarantee after 10 or 15 years for the segregated funds. One can consider these segregated funds as being mutual funds since the guarantees of these funds now offer little protection to the customer. How can we justify the difference in regulations between these 2 products? In fact prohibited practices in the mutual fund industry occur in the segregated funds industry such as no need for investment risk tolerance assessment or sales incentives banned in the mutual fund industry.
The same regulations should apply to these 2 products. This will make it possible to establish standards of service in estate preservation (insurance industry) in retirement planning (mutual fund and segregated funds). It is time this becomes a priority for the financial industry. This will change the perception of the public in regards to financial advisors – from products peddlers into providers of service. Finally this will remove any negative influence from manufacturers of financial products on the objectivity of the financial advice.