The article “The Real ‘Advice Gap’ When It Comes To Financial Planning Has Nothing To Do With Investment Products” was originally published on Financial Post on September 18, 2019.
Investors are suffering from a lack of access to comprehensive financial advice
If you have enough money to invest, you can choose from a variety of independent investment firms and portfolio managers beyond just the banks. But these days, just how much counts as “enough” is rising. Investors with over $500,000 in investable assets have plenty of options. But where can those with less go for financial advice?
The Ontario Securities Commission (OSC) published a survey this summer with Innovative Research Group to look at fees and advice. The poll of 3,000 Canadians was entitled A Measure of Advice: How much of it do investors with small and medium-sized portfolios receive?
Some people in the investment industry have warned against the banning of trailing commissions and deferred sales charges because of the risk of an “advice gap” forming. The concern is that if advisors cannot be paid ongoing embedded product fees or investors cannot be charged a penalty for selling their investments early, smaller investors may wind up losing access to advice altogether.
The OSC found that “it is not at all clear that preserving the availability of trailing commissions will ensure investors with small and medium-sized portfolios get access to advice that meets their needs.”
Nearly one third of those polled said their advisor had never spoken to them about planning for important financial goals like retirement, including more than one quarter of those with over $250,000 of investments.
Almost half of the mass-market and mass-affluent respondents reported the duration of contact with their advisor over the past year was less than one hour.
It may be that the true advice gap is not a potential future risk of changes to investment fees or to regulatory reform squeezing small investors, but rather, the risk that advisors, regardless of client account size, are not providing much advice right now in the first place.
Financial advice for many investors big and small is focused primarily on investment selection. The problem with that approach for investors and advisors alike is that investment management is becoming increasingly commoditized.
Low-cost mutual fund companies have minimum investments starting at $25. Robo-advisors are lowering the cost of investing and decreasing the minimum investment for discretionary portfolio management to $5,000 or less. All-in-one exchange-traded funds can provide a globally diversified portfolio of stocks and bonds in a single ETF at less than one quarter of a per cent. Some discount brokers provide free online trading with no commissions.
Now, more than ever, investors of all sizes have plentiful access to investments. That potential “advice gap” has virtually disappeared. The more precious commodities that professional advisors have to offer are in the areas of behavioural finance, retirement planning, tax reduction, estate maximization, risk management, and investment strategy.
If you are a large investor, with over $500,000 invested, you might expect more than just investment selection from an advisor. If you are a small investor, with as little as nothing to invest, you should know that there are options.
If you need tax advice, you can buy a couple of hours of time from a tax accountant. Not all Chartered Professional Accountants (CPAs) are created equal. Some CPAs who work in public tax practices may be better versed in tax preparation or corporate taxation than personal tax planning. So, look for an accountant with appropriate personal tax planning expertise.
If you need estate advice, you can do a consultation with an estate lawyer. Consider a lawyer whose practice is focused on estate planning as opposed to a general practitioner who just happens to do wills.
There are fee-for-service financial planners who provide comprehensive financial advice for an hourly, project, or annual fee, without managing your investments. If you are outside of Quebec, look for a Certified Financial Planner (CFP) or Registered Financial Planner (RFP). Surprisingly, Quebec is the only province that restricts who can call themselves a financial planner, so beware anywhere else in Canada.
The government could help small and medium sized investors get advice. Taxpayers have long been able to deduct carrying charges and interest expenses related to their investments. This includes expenses like investment management fees and interest on money borrowed to buy a rental property.
The problem is the investments in question must be taxable, non-registered investments. Given most Canadians cannot fully utilize their RRSP or TFSA room, let alone build a taxable investment portfolio, such deductions clearly cater to larger, wealthier investors. As do rental property expenses, at a time when home affordability has become a hot button political issue.
Taxpayers can deduct expenses for arguably questionable expenses such as union dues and moving expenses. Why not consider a tax deduction for financial advice provided by an eligible professional such as an accountant, lawyer, or professional financial planner that could be claimed by small and medium sized investors? Consider that my admittedly biased submission for the 2020 federal budget.
In the U.S., up until 2017, there was a tax deduction for financial planning fees. The caveat was that the fees were only deductible to the extent they exceeded 2 per cent of a taxpayer’s income, making the deduction potentially more valuable to those with lower incomes.
Investors of all shapes and sizes can get access to investment products and will continue to have access even if embedded fees and deferred sales charges are abolished. The true advice gap goes beyond simply the ability to buy investments and extends to a lack of access to comprehensive financial advice. Larger investors will always have more access, but even small investors have options if they look beyond the teller at their local bank branch.
Jason Heath is a fee-only Certified Financial Planner (CFP) and income tax professional for Objective Financial Partners Inc. in Toronto, Ontario.