VALUE OF FINANCIAL ADVICE TO ONTARIO S HOUSEHOLDS, ECONOMY & GOVERNMENT SMALL BUSINESS FINANCIAL ADVISORS HELPING MIDDLE CLASS ONTARIANS

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1 VALUE OF FINANCIAL ADVICE TO ONTARIO S HOUSEHOLDS, ECONOMY & GOVERNMENT SMALL BUSINESS FINANCIAL ADVISORS HELPING MIDDLE CLASS ONTARIANS APRIL 2013

2 CONTENTS 3 VALUE OF FINANCIAL ADVICE 4 IMPORTANCE OF THE FINANCIAL ADVICE SECTOR TO ONTARIO S ECONOMY 5 THE NEED FOR APPROPRIATE REGULATION 5 A NEW WAY FORWARD RAISING FINANCIAL ADVISOR PROFESSIONALISM TO PROTECT CONSUMERS 7 ABOUT ADVOCIS AND ITS MEMBERS 2

3 VALUE OF FINANCIAL ADVICE Financial advice spans entire life cycle of Ontario families Professional financial advisors help Ontarians to prepare themselves for important events and needs throughout their lives, and to become more financially self-sufficient. Financial advisors play a fundamental role in raising the financial literacy of their clients. More and better financial advice will improve the financial literacy of consumers. The Task Force on Financial Literacy found that Canadians require financial literacy throughout all stages of their lives. Among its key recommendations: Coping with illness and disability Receiving unexpected money Being victimized by fraud Getting separated or divorced Planning for retirement Opening an account Getting a new job Dealing with dying and death Caring for a loved one Starting a business Losing a job Acquiring an education that the Government of Canada, in partnership with stakeholders, provide tools to help Canadians become better informed about the role and benefits of professional financial advice, as well as how to choose a financial practitioner. Living your retirement Having a baby Getting married Buying a car Buying a home Based upon information from Investor Education Fund: Source: Task Force on Financial Literacy Report, December 2010 Ontario households are much better off when they receive professional financial advice Professional financial advisors help Ontarians to save and plan for their future, and to protect the savings they have accumulated through comprehensive planning and a wide range of life and health insurance and investment solutions. People who receive financial advice accumulate significantly more financial wealth, are better protected, and are better prepared for retirement and unexpected events than people who do not receive advice. Ratio of Advised vs. Non-Advised Financial Assets Growth in Financial Assets Over Time of Households that Received Advice Compared to Those That Did Not Receive Advice 1.58x 1.99x 2.73x 4-6 Years 7-14 Years > 15 Years Years with a Financial Advisor Source: Econometric Models on the Value of Advice of a Financial Advisor; CIRANO; July

4 IMPORTANCE OF THE FINANCIAL ADVICE SECTOR TO ONTARIO S ECONOMY Over 30,000 small business financial advisors assist 4 million Ontario households The financial advice sector is a vital part of Ontario s economy, and is crucial to the long-term financial health of the province s families and small businesses. Ontario needs a competitive market for financial services that offers consumers a range of choices, including access to small business financial advisors. Small business financial advisors serve Main Street Ontarians The average of household assets under management of small business advisors is approximately $70,000, which represents the financial assets of Main Street Ontario families. Small business financial advisors account for nearly $15 billion in new life and health insurance solutions for Canadians Financial advisors do more than just help their clients save and accumulate wealth; advisors provide a wide array of life and health insurance solutions that protect the savings of clients and their beneficiaries, provide a stream of income well into retirement, and assist in difficult times of disability or critical illness. Ontario households received $30 billion in life insurance, annuity and health benefit payments in Greater access to financial advice for Ontarians means less reliance on government Small Business Financial Advisor Assets under Management ($billions - Canada) Independent Advisors $170.1 $64,654 $11.6 Average Client Size Average Book Size ($ millions) Career Advisors $91.0 $74, Source: Investor Economics (2012) The financial security and independence of middle-class households is vitally important, since people will become less reliant on the government for their future financial needs such as retirement income, long-term care and disability. This ultimately helps the government to deal with the mounting fiscal pressures of an aging population. $5.2 New Business Insurance Premiums in Canada 2011 ($millions) $1,050 $162 $12,250 $1,310 Living Benefts Life Insurance Segregated Funds Annuities 4

5 THE NEED FOR APPROPRIATE REGULATION Cost of regulating financial advisors in Canada has exceeded $2.5 billion approximately $25,000 per advisor and continues to rise At a time when growth in the industry has been slow or negative, regulation has been a growth business. Red tape compliance costs continue to rise sharply, threatening the business model of financial advisors who serve middle-class Ontario households. New regulatory proposals such as introducing a statutory fiduciary standard for financial advisors and 25% 20% 15% 10% -5% drastically restructuring current advisor compensation approaches will drive financial advisors out of the business, leaving significantly more consumers without access to professional financial advice. Consumers suffer as financial advice becomes less affordable 5% 0% 14% 10% 9% Annual Growth Rates in Operating Expenses -4% MFDA IIROC OSFI Securities Comissions Regulators Source: Fusion Consulting (2012). Note: Does not include costs of insurance regulators The real cost of regulatory red tape is that professional financial advice is less affordable and less accessible for the average Ontario household and small business. If compliance costs are not reined in, consumer choice and access to financial products, services and advice will diminish. The current regulatory trends are creating significant barriers to entry for new advisors. More appropriate and effective regulation is needed that will protect the public without hampering the ability of financial advisors to serve Ontarians in uncertain economic times. A NEW WAY FORWARD RAISING FINANCIAL ADVISOR PROFESSIONALISM TO PROTECT CONSUMERS Raising the bar for all financial advisors An effective regulatory approach The most effective way of regulating financial advice is through a requirement that all financial advisors belong to a professional association with a code of professional and ethical conduct and high education standards. Mandating industry-led professional standards will assist in protecting consumers by getting rid of unethical advisors and fraudsters, and by instilling greater public confidence that consumers are dealing with a professional. Today, anyone can call themselves a financial advisor Consumers need to know that they are dealing with an ethical, professional financial advisor. Unfortunately, anyone can hold themselves out to the public as a financial advisor or planner. While provincial insurance licensing and securities registration oversees life insurance and securities transactions, the advisory conduct of financial advisors remains an area of concern as it varies greatly among advisors. 6% 22% 20% 5% 4% 11% 9% 7% 8% 6% 5% 4%

6 Protecting the usage of the title financial advisor is timely and appropriate. Financial advisors and planners are one of the last groups of specialized practitioners whose professional title is not protected in law. Examples of practitioners whose titles are protected in law include doctors, lawyers, accountants and engineers. Consumers are exposed if they are not dealing with a qualified and ethical financial advisor. Advocis has developed a detailed proposal Government should enact the appropriate legislation Anyone selling financial products to consumers in the province of Ontario should be required, as a condition of being licensed to sell financial products, to maintain ongoing membership in a recognized professional association. An accredited association would have: 1. Code of professional and ethical conduct 2. Requirement that members maintain errors and omissions insurance 3. Enhanced minimum initial proficiency standards 4. Continuing education addressing substantive and professionalism matters 5. Published best practices manual 6. Governance structure that includes representation from the public 7. Complaints and disciplinary process, with powers to suspend an advisor s membership 8. Public database whereby consumers could conduct a one-stop check of advisor credentials and disciplinary history Advocis strongly encourages the government to introduce the appropriate legislation to accredit professional associations. We are building industry and consumer support and have approached other interested provinces, including British Columbia, Alberta and Saskatchewan. Key Benefits: All stakeholders gain from enhanced professionalism Consumers access a one-stop online database to review credentials of individuals who hold out as financial advisors assurance that financial advisors meet a consistently high level of professionalism and accountability receive greater protection from unqualified and unethical financial advisors take advantage of a complaints and disciplinary process when an advisor has violated their professional code greater access to professional financial advice that will assist in raising financial literacy Financial advisors enhanced public trust, status and confidence in advisors as professionals collectively raise the professional bar through education and standards access resources that complement and facilitate standards and regulatory compliance removal of unethical individuals who tarnish the entire industry Government and regulators delivery of enhanced consumer protection and the reining in of unethical advisors who can currently move from sector to sector additional protection of the wider public from unqualified and unaccountable individuals implementation of a low-cost, industry-led regulatory option benefit from the combined expertise of professional associations, all of whom will contribute to the development of public policy and implementation of effective regulation 6

7 Product providers and distributors greater trust in the professionalism of financial advisors representing their firms prevention of unethical advisors moving from one company to the next stronger platform for supporting the recruitment of new advisors into the industry through enhanced professional standing ABOUT ADVOCIS AND ITS MEMBERS Who we are Advocis, The Financial Advisors Association of Canada, is the association of choice for financial advisors and planners. With more than 11,000 members across the country, Advocis is the definitive voice of the profession, advocating for professionalism and consumer protection. Professional financial advisors and planners are critical to the economy, helping consumers make sound financial decisions that ultimately lead to greater financial stability and independence. Advocis works with decision-makers and the public, stressing the value of financial advice and striving for an environment in which all Canadians have access to the advice they need. With 5,000 advisors and planners across Ontario, Advocis members are provincially licensed to sell life and health insurance, mutual funds and other securities. Working cooperatively with government Advocis has a long-standing tradition of working cooperatively with the government and its regulatory bodies such as the Financial Services Commission of Ontario, to ensure that consumers of financial services are adequately protected, have ample choice and access to professional financial advice, and that the financial advisory business continues to be an important part of Ontario s economy. Advocis members are resourceful Advocis Member Community Involvement Our members are a vital resource with a great deal of expertise in areas of importance to the government, including retirement planning, pension plans, health care, and employee benefit programs. Advocis has made representations to the government and regulatory agencies on a wide range of subjects including improving the pension and retirement system, securities regulation, insurance regulation and inter-provincial agreements. 12% 13% 17% Advocis members get involved Advocis members are in communities across Ontario. They are very active in their local communities, participating in charities and community-based initiatives. 58% Source: Advocis Member Survey, 2011 Time Money Time and Money Not Involved 7

8 QUESTIONS? If you have questions or comments, please contact: Peter Tzanetakis VP Government and Corporate Relations Advocis, The Financial Advisors Association of Canada Tel: ext Fax: or- Juno Da Silva Executive Assistant, Government and Corporate Relations Advocis, The Financial Advisors Association of Canada Tel: ext Fax: Queens Quay West, Suite 209 Toronto, ON M5V 3A2