What’s in a name?

Mal Abrigo
Mal Abrigo – a small nondescript town in Uruguay. The British built a train station here that was never connected to anywhere – I guess nobody wanted to come to a place called “bad overcoat”.

According to a 2014  Advocis sponsored  PwC report there are approximately 100,000 financial advisors in Canada (yes, 1 for every 350 man, woman and child).  Of those, 44% are insurance based, 33% non-bank dealer based, 13% bank based and 10% at full service brokers.  (The report only lists 450 “fee-only financial planners”). Business models run the spectrum in terms of product focus, client type, compensation scheme, regulatory designation, etc.  Despite the large differences, from the consumer point of view, they are all presented as “financial advisors” which causes a tremendous amount of confusion and I suspect a lot sub-optimal outcomes.

As a result there is a fair amount of furor among various industry constituents about whether there should be a more restrictive naming conventions imposed on the industry.  If someone’s main job is to broker stocks, call them a stock broker.  If someone’s main job is to sell insurance, call them an insurance salesperson.  If they sell mutual funds, call them a mutual fund salesperson.  If someone creates financial plans for people, call them a financial planner. Arguments on both sides of the debate unsurprisingly are rooted in self interest.   The motivations are sensible  – “financial advisor” or “wealth manager” sound a little more attractive from a marketing perspective than more direct titles.  I suppose the challenge is that retail investors don’t understand that dynamic or perhaps worse, actually believe that there is some regulation or governing body policing job titles with the consumer’s best interest in mind – “this person is called an advisor so I assume they are giving me advice that is good for me”.

When I worked in the equity department for a global investment bank, it didn’t seem to matter what I did – I was called “salesperson”.  Some argue that job titles should be restricted to provide a better indication to consumers of the nature of the commercial relationship.  Unfortunately we think this would likely cause more confusion.  Whatever naming system the various industry players eventually agreed upon would be unlikely to properly specify providers’ roles which, if anything, would leave consumers even more confursed or worse, with a false sense of security.  There will be bad advisors with good names and good advisors with bad names.  That won’t change.

What needs to change is the level of transparency and investor education.  Current regulatory changes are in progress to address improved transparency.  Investor education is a bit trickier.  You can’t mandate it, proposals to introduce financial education earlier in life at schools generally go nowhere given budget constraints and, frankly, people hire advisors in the first place partly because they need help learning about finance.

Regulations take years and often have unintended consequences.  The market is slow to weed out bad apples and the established players are firmly entrenched.  Improvements will happen but slowly.  In the meantime we suggest you direct the following questions to your existing or prospective advisor, no matter what they’re called:

  • What are your credentials / qualifications?
  • How will you help me achieve my financial goals?
  • How and how much are you compensated for working with me?
  • Does your firm incentivize you or expect you to offer me specific products for any reason?
  • What is your regulatory designation?  Are you held to a fiduciary standard – i.e required by law to act in my best interest?