Monday, February 28, 2011

MGA SYSTEM UNDER FIRE IN CANADA - GLOBE AND MAIL SERIES SPARKS STONG INDUSTRY REACTION

The Globe and Mail’s article, “Through Canada’s insurance loophole,” published Dec. 18, 2009  elicited strong reaction from the insurance distribution channel. The article opened by citing the case of a 96-year-old Vancouver woman who cashed in a $200,000 segregated fund and invested it in her insurance agent’s company, leaving the woman’s disabled 71-year-old son without the inheritance he’d counted on.


It went on to blame the growth of the MGA system for severing the chain of oversight between insurers and independent agents. The report claimed to have uncovered “a gaping hold in Canadian insurance regulation…nearly half of all individual life insurance policies in Canada are now being transacted through MGAs, which often undertake little – if any – oversight of agents in the market.”


“To equate the plight of a 71-year-old man hooked up to an oxygen tank with the emergence of MGAs is ridiculous,” said Paul Brown, CEO of Worldsource Insurance Network, a Vancouver-based MGA. “The issue was a financially desperate advisor acting outside of her insurance licensing.”


The report stated that the Canadian Council of Insurance Regulators, the umbrella group of provincial regulators, “became aware of the MGA issue at least two years ago and assigned a group of officials to look into it. However, the group has yet to report or take any action.”


Carol Shevlin, the CCIR’s Toronto-based policy manager, said the group has indeed been looking at MGAs, and has just released a paper titled Managing General Agents: Life Insurance Distribution Model. But she added that the CCIR’s review of MGAs was not a response to any known problems, but rather the first in a series of reports the CCIR is planning. “We’re looking at the various things that have grown up in recent years between the insurance companies and policyholders, and whether there is anything to be concerned about. It’s all part of our risk-based approach to market conduct regulation.”


Accountability


Accountability of MGAs is among the issues explored in the CCIR paper, she added. The paper’s release was eagerly awaited by the industry where accountability to consumers for the actions of rogue or negligent agents is a hot-button issue.


Peter Lamarche, president of the Canadian Association of Independent Life Brokerage Agencies (CAILBA) that represents MGAs, said there is ongoing discussion among insurers, MGAs and regulators about who is responsible for agent oversight. CAILBA’s position is that the agent is the person primarily responsible for product suitability. “The decision about which product the client will purchase is a decision reached between the agent and the client,” he said. “We, in turn, are responsible for knowing our agents. Just from a business risk point of view, we need to know who our agents are, and take care in the hiring process with screening and background checks.


“And if, for example, a new advisor sold 50 of the same type of product to members of the same community, generating commissions of more than $100,000, the onus would be on the MGA to investigate this advisor.”


Insurance companies also have a responsibility to the consumers who buy their products. When a consumer buys insurance, he buys it from the insurance company, not the agent, noted Allan Bulloch, president of Independent Planning Group Inc., an Ottawa-based MGA. He gave an example from his own practice of a client who was facing a deadline to convert an insurance policy.


“We were advised by the insurance company, we advised the agent, the agent discussed the matter with the client, who agreed to convert the policy,” he said. “But nothing happened and the deadline passed. The client professed that he had communicated his intentions to the agent and showed us his e-mails. The insurer reviewed the case and agreed that the right thing was to allow the client to do what he’d intended and convert the policy.”


“Insurance policies are held directly with the insurance company,” CLHIA’s Ms. Hope said, “and it will stand behind its policy. The insurance company is the party that is accountable to clients.”


In a letter to the editor of The Globe and Mail, Jim Rogers, founder and chairman emeritus of Vancouver-based Rogers Group Financial Ltd., said insurance companies should be held liable for the actions of both their MGAs and the agents who put their business through these MGAs.


“The companies should be held vicariously liable,” he added in an interview, “meaning they should be held liable by reason of their association with the MGA. If I’m going to be held vicariously liable, I’m going to have a pretty tight contract with my MGA in place.”


In a posting on his blog, RickardsRead.com, Alastair Rickard, a former life insurance company executive with Mutual Life, Clarica Life and Sun Life Financial, and founding editor of the Canadian Journal of Life Insurance, echoed this: “Life companies should not be allowed to shelter from accountability to clients for deficient actions by those who sell their products behind a wall [legal and/or regulatory] comprised of those who facilitate the sale of the company’s financial products…whether those salespersons are MGAs, individual agents placing business directly with a brokerage company or via an MGA or a company’s career agent.”


At present, that would be difficult to enforce. “Each province has its own regulator that is responsible for oversight of life agents, and each province has an insurance act and regulations that govern some training and supervision requirements,” Harold Geller, a lawyer with Doucet McBride LLP said. “But the extent of responsibilities on insurers as a result of the acts or regulations varies among provinces. Some provinces, like Newfoundland, have a reasonable level of supervision. Some provinces, like Ontario, have supervision wording that is outdated and has little, if any, practical application.


“Quebec is unique in Canada,” he added, “and has much higher standards for the advice and sale of financial products. These standards provide a much higher level of consumer protection and advisor professionalism.”


“MGAs in the main do not exercise the same level of interest/compliance supervision as do those life companies with their own career agents,” Mr. Rickard said in his blog.


But the career agency system is not immune to fraud either. “The outright defrauding of clients, relatively infrequent, can and has occurred involving licensed life insurance intermediaries in all parts of the active agency system, including the best managed and supervised career agency systems of the very best life insurance companies – as I know as a matter of first-hand knowledge,” Mr. Rickard added.


Mr. Brown said the Globe and Mail article failed to point out that MGAs have been instrumental in bringing better products and services to Canadian consumers through independent brokers.


“Years ago, when I first got into the business, I was a captive agent and sold the insurer’s products exclusively,” Mr. Bulloch said. “Today I can offer more choice and, thus, better represent my clients.”


The Dec. 18 article implied more regulation of MGAs and agents is needed. “The MGAs are trying to stave off regulation, worried that new rules will be bad for the bottom line,” it said.


CAILBA strongly disagrees with this statement, Mr. Lamarche said, “as evidenced by our actively participating with the CCIR and other provincial regulators.” And he disagrees with the implication “that regulators are powerless and have done little in the area of compliance,” citing the CCIR’s recent work on understanding the MGA distribution channel, with input from CAILBA.


More disclosure, not more regulation, is needed, said Randy Reynolds, president of Financial Advisors Brokerage Group Inc., a Vancouver-based MGA. “The higher the level of disclosure, the more confidence the consumer will have in the insurance system. I believe in disclosing compensation and any conflicts of interest to the client. Perks such as conferences and travel should be disclosed. And commissions need to be disclosed.”


Mr. Geller said the provinces have “a checkerboard approach” to disclosure. “Ontario has weak disclosure requirements…There are no meaningful requirements with respect to disclosure of conflicts of interest, compensation, limited shelves [that an agent can only get or chooses to offer contracts from a limited number of insurers] or the impact of these issues on the agent’s representations, competitiveness and objectivity.”


Compensation disclosure


CLHIA members, making up 99% of Canadian insurers, require agents to disclose method of compensation, the companies they represent and conflicts of interest to the consumer.


“To my knowledge, no court has considered these as informative or binding,” Harold Geller said, “nor can the CLHIA disclosure requirements be considered to require meaningful disclosure understandable to the average purchaser of life insurance.”


Mr. Rogers said he would like to see a disclosure document provided to the client by the agent that lists the services the client will get, how and what he’ll pay for them, the agent’s qualifications (education and experience) and the procedure for making complaints.


Some MGAs are taking steps to protect themselves and the agents who work with them from liabilities that could arise from transactions with clients. Gary Goldshmidt, president of Stone-Hedge Financial Group Inc., a Toronto-based MGA, put a compliance regime in place when he set up his company a few years ago. Agents who work through his MGA have to document the client’s suitability for the policy or investment, and Mr. Goldshmidt has developed a guide to measure risk tolerance. Agents also provide clients with a disclosure document making them aware of the fees they are paying, and a privacy protection document. “Agents need to view compliance as an asset rather than a liability,” he added, “because agents as well as dealers can find themselves on the line.”


CAILBA is developing its new Compliance Toolbox (See The Insurance and Investment Journal, November/December 2010) to help MGAs set up compliance regimes. The first phase, being launched this spring, will supply MGA members with a generic set of compliance documents. Use of the toolbox won’t be mandatory, Mr. Lamarche said, “but rather part of suggested best practices.”




A series of articles that ran in The Globe and Mail in December on the Canadian life insurance industry has sparked debate in the insurance industry. Some call the articles misguided, misinformed and exploitative. Others say they pinpoint major problems in the in¬dustry. And still others say that, while elements may be misleading and exaggerated, they turn the spotlight on a number of troublesome issues, and some good may result from it.


The Dec. 22 article in the series entitled, "What your broker doesn't want you to know," claimed that commissions, bonuses and free trips often factor into an agent's decision to recommend certain policies to clients. These incentives, the report said, are paid by insurance companies to keep brokers coming back to them, and they take three forms: upfront commissions when the sale is made; bonuses based on the volume of business a broker does with that insurer; and perks such as trips to promote loyalty and encourage brokers to bring as many clients to that insurer as possible.


The fact that life insurance companies compete for the business of agents is com¬mon knowledge in the industry. Insurance companies provide incentives to agents to encourage clients to stay with them, said Lawrence Geller, president of L.I. Geller Insurance Agencies Ltd. in Campbellville, Ont. "Book bonuses for life agents are based on how large the agent's book of business is, and how much business the agent did with the insurance company that year," he noted.


Proper disclosure


The Canadian Life and Health Insurance Association, representing 63 Canadian insur¬ers, said it doesn't get involved in its members' incentive practices. "It's a competitive issue among companies, like pricing," said Wendy Hope, CLHIA's Ottawa-based vice-president, external relations. "What we're concerned about is that there's proper disclosure of incen¬tives to the consumer, and we're constantly upgrading our disclosure guidelines."


And only a small percentage of agents qualify for junkets in terms of the sales they generate. "Trips are for high-flying agents," said Bradley Sumner, a financial planner and independent life agent with Investment Planning Counsel in Kingston, Ont., "But I don't think those who take them are compromising themselves. Agents work with companies because they like their products and the service they provide to back them up. And we need these opportunities to network with others in the industry."


Some people work with a company because they appreciate the ease in dealing with it, Lawrence Geller added. "With today's older population requiring a lot more health care than in the past, we're seeing a lot of products on the market. It can be important for an agent to be able to speak to the underwriter."


A free trip may not appear to compromise an agent's ability to work in the client's best interest. After all, there is an educational component, and the cost of the trip is taxable in the hands of the agent.

But according to Dan Zwicker, principal with Toronto-based investment consultants First Financial Consulting Group, compensation of this kind is reflective of the conflicts of interest inherent in the financial services industry.


"In a product-driven, financially incentivized industry, the agent's choice of product is somewhat less than unbiased," he said, "and unless there is total compensation transparency, the client is never absolutely sure that he has received unbiased advice. Every decision the advisor makes has two dimensions to it:


Is this in the client's interest? And is this in my interest? Within a professional practice context the two considerations are sometimes incompatible."


The insurance industry is geared towards keeping people who deal with consumers in the role of salespeople rather than insurance professionals, according to Harold Geller, a lawyer with Doucet McBride LLP in Ot¬tawa who specializes in the financial services industry. "There are different standards of care governing an advisor selling mutual funds and a life insurance agent," he said. "The fact that there is no KYC obligation on the part of the insurance agent suggests that insurance products are somehow inferior, not requiring the same level of professionalism as mutual funds.


"And insurance agents are not required to have the same level of entrance standards, training and continuing education as other professionals in Canada," he added. "Yet insurance is a profession that has perhaps the greatest impact on the consumer of any profession. Today people need significant resources for retirement and they turn to financial advisors for expertise."


In a letter to the editor of the Globe and Mail, Jim Rogers, founder and chairman emeritus of Vancouver-based Rogers Group Financial Ltd., past two-term chairman of the Canadian Association of Insurance and Financial Advisors (now Advocis) and past president of the Million Dollar Round Table, said the "lack of accountability problems" cited by The Globe and Mail reporters "are pretty well as they have laid out."


Many elements go into the cost of an insurance policy, he noted in an interview with The Insurance and Investment Journal. "For every $1 a consumer sends an insurance company, how much of it goes to cover the risk, towards administrative costs, towards distribution? What's wrong with the consumer asking how much you're getting paid out of it? saying, 'Tell me what you're doing for your 20%'."


"Every time an agent recommends a prod¬uct that brings him more compensation, he should be required to disclose the difference in compensation he would have earned from competing like products," Harold Geller added. "And he should be required to disclose the differences between the like products, both the benefits and the downsides. If not, there is a definite conflict of interest."


Consumer awareness


The Globe and Mail articles may have started a process of consumer advocacy, Harold Geller said, that could result in profound change. "Groups like CLHIA and the Joint Forum of Financial Market Regulators wave their hands in the direction of consumer interests, but routinely undermine efforts to bring about a level playing field for consumers."


Mr. Rogers applauded the articles for "shining some light on these issues. Some public good may come of it."


And Alastair Rickard, a former life insurance company executive with Mutual Life, Clarica Life and Sun Life Financial, and founding editor of the Canadian Journal of Life Insurance, praised the Globe and Mail "for devoting serious and extensive attention to life insurance agency distribution in Canada and related issues. I cannot recall a single article in any Canadian daily newspaper presenting such an extensive look at life insurance agency distribution."


"Articles like these are a wonderful oppotunity for the industry to look itself in the face and ask, 'Are we doing a comparable job to the professionals in other industries?' The answer would have to be no," Harold Geller said. 


 


The Globe and Mail's article, "Through Canada's insurance loophole," published Dec. 18 elicited strong reaction from the insurance distribu­tion channel. The article opened by citing the case of a 96-year-old Vancouver woman who cashed in a $200,000 segregated fund and invested it in her insurance agent's company, leaving the woman's disabled 71-year-old son without the inheritance he'd counted on.

It went on to blame the growth of the MGA system for severing the chain of oversight between insurers and independent agents. The report claimed to have uncovered "a gaping hold in Canadian insurance regulation ... nearly half of all individual life insurance policies in Canada are now being transacted through MGAs, which often undertake little¬if any - oversight of agents in the market."


"To equate the plight of a 71-year-old man hooked up to an oxygen tank with the emergence of MGAs is ridiculous," said Paul Brown, CEO of Worldsource Insurance Network, a Vancouver-based MGA. "The is¬sue was a financially desperate advisor acting outside of her insurance licensing."

The report stated that the Canadian Council of Insurance Regulators, the um¬brella group of provi ncial regulators, "became aware of the MGA issue at least two years ago and assigned a group of officials to look into it. However, the group has yet to report or take any action."

Carol Shevlin, the CCIR's Toronto-based policy manager, said the group has indeed been looking at MGAs, and has just released a paper titled Managing General Agents:

Life Insurance Distribution Model (see page 3). But she added that the CCIR's review of MGAs was not a response to any known problems, but rather the first in a series of reports the CCI R is planning. "We're look¬ing at the various things that have grown up in recent years between the insurance companies and policyholders, and whether there is anything to be concerned about. It's all part of our risk-based approach to market conduct regulation."

Accountability

Accountability ofMGAs is among the issues explored in the CCIR paper, she added. The paper's release was eagerly awaited by the industry where accountability to consumers for the actions of rogue or negligent agents is a hot-button issue.

Peter Lamarche, president ofthe Canadian Association ofIndependent Life Brokerage Agencies (CAILBA) that represents MGAs, said there is ongoing discussion among in¬surers, MGAs and regulators about who is responsible for agent ovcrsight. CAILBA's position is that the agent is the person primar¬ily responsible for product suitability. "The decision about which product the client will purchase is a decision reached between the agent and the client," he said. "We, in turn, are responsible for knowing our agents. Just from a business risk point of view, we need to know who our agents are, and take care in the hiring process with screening and background checks.

"And if, for example, a new advisor sold 50 of the same type of product to members of the same community, generating commissions of more than $100,000, the onus would be on the MGA to investigate this advisor."

Insurance companies also have a respon¬sibility to the consumers who buy their products. When a consumer buys insurance, he buys it from the insurance company, not the agent, noted 1\llan Bulloch, president of Independent Planning Group Inc., an Ottawa-based MGA. He gave an example from his own practice of a client who was facing a deadline to convert an insurance policy.

"To equate the plight of a 71-year-old man hooked up to an oxygen tank with the emergence of MGAs is ridiculous."

"We were advised by the insurance company, we advised the agent, the agent discussed the matter with the client, who agreed to convert the policy," he said. "But nothing happened and the deadline passed. The client professed that he had communicated his intentions to the agent and showed us his e-mails. The insurer reviewed the case and agreed that the right thing was to allow the client to do what he'd intended and convert the policy."

"Insurance policies are held directly with the insurance company," CLHTA's Ms. Hope said, "and it will stand behind its policy.

The insurance company is the party that is accountable to clients."

In a letter to the editor of The Globe and Mail, Jim Rogers, founder and chairman emeritus of Vancouver-based Rogers Group Financial Ltd., said insurance companies should be held liable for the actions of both their MGAs and the agents who put their business through these MGAs.


"The companies should be held vicariously liable," he added in an interview, "meaning they should be held liable by reason of their association with the MGA. If I'm going to be held vicariously liable, I'm going to have a pretty tight contract with my MGA in place."


In a posting on his blog, RickardsRead.com, Alastair Rickard, a former life insurance company executive with Mutual Life, CIa rica Life and Sun Life Financial, and founding editor of the Canadian Journal of Life insurance, echoed this: "Life companies should not be allowed to shelter from account¬ability to clients for deficient actions by those who sell their products behind a wall [legal and/or regulatory] comprised of those who facilitate the sale of the company's financial products ... whether those salespersons are MGAs, individual agents placing business directly with 'a brokerage company or via an MGA or a company's career agent."

At present, that would be difficult to enforce.
"Each province has its own regulator that is responsible for oversight of life agents, and each province has an insurance act and regulations that govern some training and supervision requirements," Harold Geller, a lawyer with Doucet McBride LLP said. "But the extent of responsibilities on insurers as a result of the acts or regulations varies among provinces. Some provinces, like Newfound¬land, have a reasonable level of supervision. Some provinces, like Ontario, have supervi¬sion wording that is outdated and has little, if any, practical appl ication.

"Quebec is unique in Canada," he added, "and has much higher standards for the advice and sale of financial products. These standards provide a much higher level of consumer protection and advisor profes¬sionalism."

"MGAs in the main do not exercise the same level of interest/compliance supervision as do those life companies with their own career agents," Mr. Rickard said in his blog.

But the career agency system is not immune to fraud either. "The outright defrauding of clients, relatively infrequent, can and has occurred involving licensed life insurance intermediaries in all parts of the active agency system, including the best managed and supervised career agency systems of the very best life insurance companies - as I know as a matter of first-hand knowledge," Mr. Rickard added.


Mr. Brown said the Globe and Mail article failed to point out that MGAs have been instrumental in bringing better products and' services to Canadian consumers through independent brokers.

"Years ago, when I first got into the business, I was a captive agent and sold the insurer's products exclusively," Mr. Bulloch said. "Today I can offer more choice and, thus, better represent my clients."

The Dec. 18 article implied more regulation of MGAs and agents is needed. "The MGAs are trying to stave off regulation, worried that new rules will be bad for the bottom line," it said.

CAILBA strongly disagrees with this statement, Mr. Lamarche said, "as evidenced by our actively participating with the CCIR and other provincial regulators." And he disagrees with the implication "that regulators are powerless and have done little in the area of compliance," citing the CCIR's recent work on understanding the MGA distribution channel, with input from CAILBA.

More disclosure, not more regulation, is needed, said Randy Reynolds, president of Financial Advisors Brokerage Group Inc., a Vancouver-based MGA. "The higher the level of disclosure, the more confidence the consumer will have in the insurance system. I believe in disclosing compensation and any conflicts of interest to the client. Perks such as conferences and travel should be disclosed. And commissions need to be disclosed."

Mr. Geller said the provinces have "a checkerboard approach" to disclosure. "Ontario has weak disclosure requirements ... There are no meaningful requirements with respect to disclosure of conflicts of interest, compensation, limited shelves [that an agent can only get or chooses to offer contracts from a limited number of insurers] or the impact of these issues on the agent's representations, competitiveness and objectivity."

Compensation disclosure

CLHIA members, making up 99% of Canadian insurers, require agents to disclose method of compensation, the companies they represent and conflicts of interest to the consumer.

"To my knowledge, no court has considered these as informative or binding," Harold Geller said, "nor can the CLHIA disclosure requirements be considered to require meaningful disclosure understandable to the average purchaser of life insurance."

Mr. Rogers said he would like to see a disclosure document provided to the client by the agent that lists the services the client will get, how and what he'll pay for them, the agent's qualifications (education and experience) and the procedure for making complaints.

Some MGAs are taking steps to protect themselves and the agents who work with them from liabilities that could arise from transactions with clients. Gary Goldshmidt, president of Stone-Hedge Financial Group Inc., a Toronto-based MGA, put a compliance regime in place when he set up his company a few years ago. Agents who work through his MGA have to document the client's suitability for the policy or investment, and Mr. Goldshmidt has developed a guide to measure risk tolerance. Agents also provide clients with a disclosure document making them aware of the fees they are paying, and a privacy protection document. "Agents need to view compliance as an asset rather than a liability," he added, "because agents as well as dealers can find themselves on the line."

CAILBA is developing its new Compliance Toolbox to help MGAs set up compliance regimes. The first phase, being launched this spring, will supply MGA members with a generic set of compliance documents. Use of the toolbox won't be mandatory, Mr. Lamarche said, "but rather part of suggested best practices."

Rosemary McCracken
The Insurance Journal
February 2011











































Sunday, February 27, 2011

CANADA'S TASK FORCE ON FINANCIAL LITERACY PUTS ONUS ON ADVISORS



Strategy would incorporate formal education, government programs, online tools and a campaign to raise awareness



Urgent action is needed to improve financial literacy in Canada, and financial advisors and other members of the financial services industry should be key players in this endeavour. So recommends the Canada’s Task Force on Financial Literacy’s report, which was released earlier this month.


The report, which calls for a comprehensive national strategy to address Canada’s pitiful financial literacy rate, identifies five priority areas: shared responsibility; leadership and collaboration; lifelong learning; delivery and promotion; and accountability.


The strategy would incorporate formal education, federal government programs, online tools and a campaign to raise consumer awareness. Ongoing evaluation of the strategy by an appointed individual would ensure accountability, the report recommends.






Of particular interest to advisors is one of the main priority areas — lifelong education — which relies heavily on advisor expertise, says Cary List, president and CEO of the Financial Planning Standards Council in Toronto.


Although the report encourages provincial and territorial governments to include financial literacy within the public-school curriculum, it also asserts that financial services providers should play a large role in education outside the classroom.


The report highlights the importance of so-called “teachable moments” — which happen when a financial decision is being made — as a time at which advisors not only provide information but also ensure it’s understood.


“That’s a big part of financial planning,” says List. “When planners meet with a client, they’re much more successful if they can get the client to understand what it is they’re trying to achieve and what the issues and challenges are along the way.”


Advocis welcomes the task force’s acknowledgement that the government needs to make a concerted effort to promote the concept of professional advice so that Canadians can make better choices when it comes to their financial well-being.


The report suggests that the government should deliver the following key messages: the pros and cons of hiring an advisor; the roles and obligations of advisors; how to choose an advisor; an explanation of the various designations and credentials; and the top questions that should be asked when considering a financial services professional.


Greg Pollock, Advocis’s president and CEO in Toronto, says the association obviously sees no downside to hiring an advisor; however, as a member of the task force, he is well aware that the strategy needs to be balanced and neutral. After all, he says, there have been several highly publicized cases in which so-called “financial advi-sors” have blatantly ripped off clients: “We recognize that we need to be cautious in terms of saying you absolutely must go out and get a financial advisor.”


To that end, the task force advocates the creation of a national website that would cover these points and offer Canadians a number of tools to improve their financial literacy. The Canadian Life and Health Insurance Asso-ciation Inc. lauds this recommendation, says Stephen Frank, CLHIA’s director of policy development and analysis in Toronto. He emphasizes that the material must be presented in a user-friendly manner on a single website: “It’s not that there’s not a lot of information already out there. It’s that it’s scattered all over the place.”


Ian Russell, president and CEO of the Investment Industry Association of Canada in Toronto, agrees that a central access point is the way to go. In fact, he says, the current state of affairs — in which Canadians have to click their way through various websites, many of which are complicated — can actually be a deterrent to financial literacy.


The IIAC commends the task force’s proposed creation of a national advisory council on financial literacy, which would be made up of various stakeholders, not just self-interested parties.


The council, as recommended in the task forces’ report, would represent all regions of the country and be composed of a broad mix of experts from community-based organizations, the financial and private sectors, and governments.


The creation of such a diverse advisory council was one of the recommendations that the Investment Funds Institute of Canada had made to the task force, says Joanne De Laurentiis, IFIC’s president and CEO. She says IFIC is pleased by the report’s proposed strategy — and IFIC especially appreciates that the report doesn’t present a simplistic, “one size fits all” solution.


“There isn’t any one thing we can do. There are a number of things we need to do,” De Laurentiis says, adding that individuals make financial decisions throughout their entire lives. Thus, financial literacy needs to be an integral part of our culture.


The task force’s report touches on this, stressing that financial literacy needs to be considered an essential life skill. The report suggests the government consider the success of its own models — most notably, the promotion and support offered to ParticipACTION, when it launched in the 1970s and 1980s, and, more recently, the Canada Food Guide — when considering how to develop a national financial literacy strategy.


Of course, there are no guarantees that any of these recommendations will be put in place. In fact, List admits feeling some skepticism when he first heard of the task force. However, after seeing the depth of the recommendations, he is optimistic because the report focuses on changing behaviours on many levels. IE



Wendy Cuthbert

Investmenr Executive
February 22, 2011

Wednesday, February 23, 2011

TASK FORCE UNVEILS NATIONAL STRATEGY TO STRENGTHEN FINANCIAL LITERACY IN CANADA



Proposed strategy features five priority areas



Canada’s Task Force on Financial Literacy is calling for the implementation of a national strategy to strengthen financial literacy in this country, and recommends efforts to educate Canadians on the benefits of getting professional financial advice.


The task force, which conducted consultations across the country last year, unveiled its report of recommendations to the Minister of Finance on Wednesday, calling for urgent action on financial literacy.


“Financial literacy is critical to the prosperity of Canadians and the nation,” said task force chairman Donald Stewart. “Increasing the knowledge, skills and confidence of Canadians to make responsible financial decisions will help them meet their personal goals, enhance their quality of life and make Canada more competitive.”


The proposed national strategy builds on financial literacy work already underway by many groups and individuals. It would be a collaborative effort between individuals, all levels of government, financial institutions and voluntary organizations


The strategy features five priority areas: shared responsibility, leadership and collaboration, lifelong learning, delivery and promotion and accountability. The strategy would incorporate formal education, federal government programs, online tools and a campaign to raise awareness. Ongoing evaluation of the strategy by an appointed individual would ensure accountability, according to the task force.


“Achieving real progress will require concerted and cooperative efforts among all stakeholders: from individual Canadians to governments at all levels, from a small non-profit helping new Canadians flourish to financial services providers and businesses throughout the economy,” said task force vice chairman Jacques Menard.


Under the plan, the formal education system would provide a foundation for financial literacy, but education would also extend beyond the classroom into workplaces, the financial services marketplace and online, with the creation of a single-source website providing unbiased information.


The report calls on financial services providers to continue to make important contributions to financial literacy in Canada.


“Financial services providers have the reach, expertise and established relationships necessary to deliver financial education to a large segment of the population,” the report says. “The Task Force recommends that financial services providers put a strong emphasis on delivering educational information and ensuring that it is fully understood by Canadians at ‘teachable moments’ so that Canadians can make responsible financial decisions.”


The task force acknowledges that many Canadians heavily rely on financial advisors for financial information, and calls for the government to make a concerted effort to build consumer awareness around financial advice as a tool to assist in financial planning and decision-making.


“As financial products become more complex and people assume greater responsibility for their retirement savings, we agree that more can be done to better inform Canadians about the use of professional advice to improve their current and future financial circumstances,” the report says. “Retirement planning and estate planning are examples of activities where consumers can benefit from the assistance of a professional financial practitioner.”


The task force suggests that Canadians should be informed on the pros and cons of professional advice, the role and obligations of advisors, the top questions one should ask when choosing a financial services provider, and the various professional financial designations and accreditations.


The report adds that professional financial advice should meet rigorous standards, especially with respect to remuneration transparency and professional qualifications.


Industry welcomes report


Advocis, the Financial Advisors Association of Canada, said it fully supports all of the task force’s recommendations, including the aspects that are directly relevant to financial advisors and planners.


“Financial advisors and planners help their clients make fully informed financial and investment decisions,” said Advocis board chairman Robert McCullagh. “An important part of an advisor’s job is to help educate and in the process elevate their clients’ level of financial literacy. The recommendations of The Task Force take what we already do to the next level. We’re delighted.”


The Investment Funds Institute of Canada also welcomed the report.


“IFIC commends the work done by Don Stewart and the members of the Task Force,” said Joanne De Laurentiis, president and CEO of IFIC. “In their report they have provided an excellent blueprint for strategies and initiatives to improve the overall level of financial literacy of Canadians of all ages.”


Financial Planning Standards Council (FPSC) called on all stakeholders to act on the report’s recommendations, for the future well-being of Canadians.


"This comprehensive report encompasses a number of important recommendations that will move Canada in the right direction towards advancing financial literacy skills," said Cary List, president and CEO, FPSC.


The Investment Industry Association of Canada also commended the Task Force for recognizing the value of professional financial advice to assist Canadians in their financial decisions.


“We strongly agree with the Task Force recommendation that the federal government should build consumer awareness of the importance of working with a registered financial professional. Greater financial literacy includes knowing how to seek a qualified professional and fully derive the benefits of financial advice.” said Ian Russell, president and CEO, IIAC.


Megan Harman

Investment Executive
February 9, 2011




 

















Wednesday, February 16, 2011

WHAT ARE THE IMPLICATIONS OF A UNIFORM FIDUCIARY STANDARD?



What the SEC says and thinks it wants from a new and universal fiduciary standard for the retail investment community and what will most likely materialize once the lengthy and politically charged sausage-making process finally concludes figures to be a much different story.

That was the general consensus from a panel of academics, attorneys and regulators gathered at the New York Law School today to address the challenges and opportunities that will likely follow the SEC's recent mandate to create and enforce a uniform fiduciary standard for broker-dealers and financial advisors.


When the SEC issued its report last month at the behest of Congress and the Dodd-Frank Wall Street Reform Act, financial advisors, broker-dealers and their attorneys were quick to break out the magnifying glass to break down every detail and nuance of a report that, in the opinion of panelist Michael Koffler, a partner in charge of the financial services group at Sutherland Asbill & Brennan, reads like a boilerplate prospectus.


"We're no closer to an end game than we were before the report," Koffler said. "Maybe even further away," adding that the report itself features a disclaimer that the study reflects the views and opinions of the SEC staff and not the commissioners themselves.


Just last week, FINRA President and CEO Rick Ketchum said legislation on the fiduciary standard would almost certainly be delayed until the fall and it was highly unlikely exam replacements would occur until late 2012 at the earliest.


"A lot of folks thought after Dodd-Frank, there would be a clear path," Koffler said. "Maybe there would be some rule making in four to five months and this would take effect sometime in 2012. That's not going to happen."


What has happened is that constitutes from both sides of the broker-dealer and financial advisor camps are gearing up for what figures to be a protracted series of reports and baton passing between Congress and the SEC. In the interim-- in addition to bolstering their lobbying war chests and crystallizing their official positions on the matter-- they're spending considerable time and money to update their technology platforms, disclosures and internal policies in anticipation of future regulation whatever it may be.


If and when a final determination is made as to exactly how a fiduciary standard should be implemented and, more important, enforced, all the panelists agreed some changes to protect investors-- without hamstringing advisors and broker-dealers-- are long overdue.


"There's no doubt that we as an industry need to increase investor protections," said Tom Bradley, president of TDA International and the event's keynote speaker. "But the mantra here has to be better regulation and not necessarily more regulation."


Bradley concedes that going back as far as the dotcom implosion in the late 1990s and more recent scandals like the mortgage-backed securities and ponzi debacles, the financial services industry has deservedly earned a black eye in the view of most investors.


"We have a major PR problem," he said. "But the good news is that it can be fixed. We can make it better."


As the development of a fiduciary standard inches along through bureaucratic channels, the panelists said common sense and attention to detail and the spirit of what Dodd-Frank and the SEC are trying to accomplish should remain at the forefront of all regulatory decisions.


"I believe where this all went wrong was when you stock brokers and broker-dealers started to provide services that looked more and more like those of an RIA," Bradley said. "The problem is that most of that was done under rules that were supposed to govern brokers."


He added that because most brokerage firms are now registered and have an RIA umbrella, any regulator efforts-- whether by the SEC, an SRO like FINRA or individual states-- should perhaps focus more on forcing financial institutions of all types to develop a more pure and transparent sales model that draws a "clear and crisp line" so investors can easily digest and understand the motivations of both brokers and financial advisors.


The SEC clearly has a disclosure mandate now," said James Fanto, a panelist and professor at the Brooklyn Law School. "I also say this whole episode should be more than a regulator arbitrage. From one perspective, it's a turf war between advisors and brokers."


"What it should be about, really, is putting clients first," he added. "[Financial advisors and brokers] are there to give investors advice and not use them as a profit center."


Larry Barrett
OnWallStreet
February 10, 2011



Thursday, February 10, 2011

DODD-FRANK: BATTLE COMING



It doesn’t take a rocket scientist to figure this out:


Without a new tax on the securities industry, there won’t be reform of same.


The drumbeat has started. The question is who is listening? And who is prepared to act on the completely unsurprising message that is being sent …


The quick summary is this:


The Securities and Exchange Commission says it does not have the resources to implement and enforce all the features of the Dodd-Frank Wall Street Reform Act asks of it. Already, it looks like it’s trying to turn the implementation of a uniform fiduciary standard for brokers and advisers over to the Financial Industry Regulatory Authority, the brokers’ self-regulatory organization.


The Commodity Futures Trading Commission says it does not have the resources to implement its responsibiities under the Dodd-Frank act. And this is the regulator that is supposed to oversee the biggest and boldest reform that is supposed to come out of the reform: The establishment of and oversight of exchanges and execution facilities along with central clearing for “standardized” credit default swaps.


It was, of course, the introduction of those quasi-insurance policies, where big banks and American International Group swapped the risk of default on credit-based derivative securities, that made financial markets comfortable they could handle mortgage-backed securities and other complex new instruments that Warren Buffett so long ago declared “financial weapons of mass destruction” that were “potentially lethal.”


Hmmm. The sage was right. Back in 2002.


But this is 2011, with budgeting going on for 2012.


Here’s how CFTC chairman Gary Gensler, he of Goldman Sachs heritage, described his agency’s resources in testimony before the House Committee on Agriculture, Subcommittee on General Farm Commodities and Risk Management:


Before I close, I will briefly address the resource needs of the CFTC. The futures marketplace that the CFTC oversees is approximately $40 trillion in notional amount. The swaps market that the Dodd-Frank Act tasks the CFTC with regulating has a far larger notional amount as well as more complexity. Based upon figures compiled by the Office of the Comptroller of the Currency, the largest 25 bank holding companies currently have $277 trillion notional amount of swaps.


The CFTC’s current funding is far less than what is required to properly fulfill our significantly expanded role. The CFTC requires additional resources to enhance its surveillance program, prevent market disruptions similar to those experienced on May 6 and implement the Dodd-Frank Act.


The President requested $261 million for the CFTC in his fiscal year 2011 budget. This included $216 million and 745 full-time employees for pre–Dodd-Frank authorities and $45 million to provide half of the staff estimated at that time needed to implement Dodd-Frank. The House of Representatives matched the President’s request in the continuing resolution it passed last week. We are currently operating under a continuing resolution that provides funding at an annualized level of $169 million. To fully implement the Dodd-Frank reforms, the Commission will require approximately 400 additional staff over the level needed to fulfill our pre-Dodd-Frank mission.


And his commission members this month are sending all kinds of signals that Dodd-Frank can’t be implemented unless some new source of funding is forthcoming.


Commission member Michael V. Dunn at a public meeting on proposed Dodd-Frank rules last Wednesday:

“We lack the staff and resources necessary to both implement Dodd-Frank and continue to fulfill our pre-Dodd-Frank duties under the Commodity Exchange Act . Without additional funding, the strain will only become worse in July, when much of Dodd-Frank goes into effect.’’


Commissioner Scott D. O'Malia at a Tabb Forum on Derivatives Reform a week ago, on the possible fallout:


"I have serious concerns about the cost of clearing … I believe everyone recognizes that the Dodd-Frank Act mandates the clearing of swaps, and that as a result, we are concentrating market risk in clearinghouses to mitigate risk in other parts of the financial system." He said regulators such as the CFTC will be challenged to implement the new rules in ways that do not make it “too costly to clear.”


And then there was this rather conspiratorial outburst from commissioner Bart Chilton at gathering of institutional investors in New York, also last Wednesday:


"Opponents of reform could not stop the Dodd-Frank Act from becoming law …"Therefore, now they have another idea—a double secret strategy. They seek to deny resources to regulators—starving us on the vine if you will—and thereby denying us the ability to enforce the new law and oversee these markets.''


This is where the potential of some sort of new tax to fund Dodd-Frank reforms comes in.


If the opponents succeed in putting a stranglehold on Congressional funding of regulators, the regulators instead are likely to be forced to impose fees on users of capital markets, to implement the reforms, Chilton said.


"If we are faced,’’ he said, “with the draconian option of no funding to implement the reform bill, putting us directly back where we were in 2007 and 2008 when the economic mess began to show its ugly head, then perhaps some type of user fee is the least onerous remedy.’’


Here’s his formula:


Approximately a billion-and-a-half contracts are traded on regulated commodity exchanges in the U. S. every six months. If market participants are charged even a third-of-a-cent transaction fee on those trades, "this could provide the funds to do our jobs,'' he said.


User fees should not just be placed on futures contracts, he said. They should also be placed on swaps transactions, he said, which is the "new area of regulation" where the commission's workload is increasing.


Over at the SEC, there’s already precedent for transaction-based fees.


In fact, that regulator, which has only a small portion of swaps to oversee, sent out this rate advisory on December 15:


Effective Jan. 21, 2011, the Section 31 fee rate applicable to securities transactions on exchanges and over-the-counter markets will increase from its current rate of $16.90 per million dollars in transactions to a new rate of $19.20 per million dollars in transactions. The Section 31 assessment on security futures transactions will remain unchanged at $0.0042 per round turn transaction.


Of course, the Dodd-Frank bill passed Congress when both houses were run by Democrats, backing a Democratic president. Now, the House is dominated by Republicans. And this is what the chairman of the House Financial Services Committee, Spencer Bachus of Alabama, said (also last week) about how much money the SEC already was receiving. And how well it has been spent.


“The SEC is currently funded at more than $1.1 billion, the Dodd Frank authorizes that to be increased to $1.5 billion for fiscal year 2012, almost identical to Chairman Schapiro’s request. Less than ten years ago the SEC's budget was approximately $400 million. While I have previously stated that Chairman Schapiro is making the SEC a more responsive agency, during the same period of increased funding, the SEC missed the Madoff and Stanford Ponzi schemes; operated a failed investment bank supervisory program that was unsuccessful in preventing the Bear Stearns and Lehman failures; and whose payroll still includes employees who appeared to have been more interested in surfing the Internet for porn leading up to the crisis than policing the financial markets for fraud. As I said last year, past experience indicates that a few investigative reporters have been more effective than the many employees at the SEC in addressing and exposing financial wrongdoing. “


The Bachus response logically would be to fund a core group of investigative reporters to take on oversight of financial markets. ProPublica, are you available?


So Dodd-Frank is coming down to this: Rules, without the funds to enforce them. Or, a new tax – call it a ‘user fee’ -- on the industry to actually make reform happen.




Tom Steinert-Threlkeld
OnWallStreet

February 2, 2011





Monday, February 7, 2011

ACCOUNTABILITY, DUTY OF CARE, FIDUCIARY DUTY - WHICH IS IT?



In Canada and in the USA financial advisors who are paid by a financial institution to market, promote and sell their products do so within a systemic conflict of interest. They are incentivized through their compensation agreements to recommend products which are in the financial interest of the institutions which 'manufacture', MGA's who 'wholesale' and advisors who retail them to the consumer.


Within this distribution paradigm the financial advisor who is accountable, who accepts his/her duty of care and fiduciary duty to place the client's interest above his/her own is faced with a financial conflict of interest with every proprietary product choice that is available.

The SEC and the Congress in the US are developing a uniform set of fiduciary rules which are focused on removing the conflict.

Great Britain and Australia have moved forward to a fee for service basis of compensation for financial advisors.

This eliminates the systemic conflict.


The US is trying to solve the issue through legislation (Dodd - Frank) and through the regulatory role of the SEC. At stake is the health of the financial institutions which generate their earnings through the sale of their proprietary products and services. On the other side of the spectrum is the financial health of the consumer who must trust the integrity of purpose of his/her advisor.

The playing field changed with the 2008 financial meltdown and Wall Street's role in it.

The consumer will have a choice. Deal with a sales representative in the purchase of a financial commodity. Or, deal with a professional financial practitioner/Advisor who is compensated on a fee for service basis - as are Chartered Accountants, Lawyers and other professional practitioners who are bound by their fiducuary obligation to their client.

It is an either or choice.

Both choices are available.

The consumer simply must be aware.

Canadians are not immune.

Dan Zwicker
Toronto

REGULATORY CHANGES MUST BE MADE TO ENSURE THAT ADVISORS ARE ACTING IN THE BEST INTEREST OF THEIR CLIENTS: FELL



UNETHICAL PRACTICES EXPOSED BY THE FINANCIAL CRISIS - OBSERVATIONS FROM ONE OF OUR BEST AND OUR BRIGHTEST - ANTHONY FELL

The financial services industry has suffered from a steady decline of ethical standards in recent years, including misguided incentives for financial advisors, which has eroded public confidence in the industry, according to Anthony Fell, corporate director and former chairman and CEO of RBC Capital Markets.


Speaking at the Investment Industry Association of Canada conference in Toronto on Thursday, Fell said the financial crisis exposed a slew of unethical practices that the financial sector adopted during the bull market of the previous years.


“In the euphoria of the boom, the industry forgot that there are many practices in the financial business which are legal, but which are also totally and completely unethical,” he said. “Wall Street lost its moral compass.”


For example, Fell pointed to such practices as hidden fees and commissions in financial products, the marketing of highly complex financial products, inadequate disclosure and “conflicted and incompetent” rating agencies.


Unethical practices are also evident in the financial advisory business, he said. For example, he noted that many investment firms offer incentives and rewards to financial advisors who generate the highest volume of sales activity. This encourages advisors to engage in frequent trading in their client accounts, which is not necessarily an indication of high quality financial advice, Fell said.


“In my experience, some of the very best and most professional investment advisors trade in their accounts very little, and therefore do not qualify for reward trips,” he said.


He suggested that advisors should be rewarded for such achievements as high levels of assets under advisement, positive client satisfaction survey results, or recommendations from branch managers.


Regulatory changes must be made to ensure that advisors are acting in the best interest of their clients, and are not influenced by any other incentives, according to Fell. He said it’s not enough to strengthen the Client Relationship Model and impose new disclosure and Know Your Client rules. Rather, all financial advisors should be subject to fiduciary duty under the law, he said.


“My advice to regulators is to become more aggressive and get on it with implementing new regulations to drive the financial industry to place the interests of clients first,” he said.


Fell added that it’s encouraging that the financial crisis has prompted regulators around the world to pursue regulatory reform. But he expressed concerns that the new regulations will be too weak.


“In effect, the new regulations have been reduced to the lowest common denominator to accommodate the weakest banks,” Fell said. “As soon as the new regulations are finalized, the best investment banking, accounting and legal brains on Wall Street will be dedicated 24/7 to getting around them.”


Effective regulations must bring discipline back into the market, and ensure that industry players take responsibility for their own actions, Fell said. He noted that the bailouts of financial institutions that occurred during the crisis in the U.S. have contributed to an erosion of discipline, providing firms with the comfort that they have a backstop regardless of the reckless risks they take.


“Going forward, it’s time to draw the line,” he said. “Let’s get risk and discipline back into the market, stop bailing out governments, banks and others, and make lenders and borrowers responsible for their own decisions.”


Overall, Fell said the consequences of the financial crisis will be felt for five to 10 years to come, as regulatory reforms are implemented and as governments and consumers learn to spend less and save more. He expects that in the next few years, growth in the economy and the stock market will both be sub-par.


IE Staff
Investment Executive
September 23, 2010




































By IE Staff











IE

Sunday, February 6, 2011

THE CASE FOR THE BANKS

COMMUNITY WEB BASED REAL TIME DEMAND: THE BANKING INDUSTRY



Why the banks are positioned to serve the 14,000,000 retiring boomers in Canada as their Financial Advisor of choice

For details visit:


http://dan-zwicker.blogspot.com/2008/12/case-for-banks-why-banks-are-positioned.html

Saturday, February 5, 2011

THE SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION (SIFMA) TAKES ISSUE WITH THE DEPARTMENT OF LABOR'S (DOL) MOVE TO REDEFINE FIDUCIARY



The Securities Industry and Financial Markets Association hit the Department of Labor with a letter complaining that a proposed rule to redefine the term fiduciary could interfere with investors’ ability to save for retirement.

The letter comes after the DOL’s October proposal to redefine when an investment advisor is considered a fiduciary. The proposed rule would mark a shift from the current standard set by the Employee Retirement Income Security Act of 1974 (ERISA). If put in place, the rule would also change how retirement plans and individual retirement accounts access products and services.


That change could interfere with individual investors’ retirement plans, SIFMA argued in its letter sent on Wednesday, as financial institutions will charge more to plan participants and IRA account holders.


If the DOL does not reconsider the proposed rule, SIFMA recommends that the organization evaluate IRAs separately to see if they need a separate fiduciary standard.


SIFMA also urged the DOL to work more closely with the Financial Industry Regulatory Authority and the Securities and Exchange Commission to make sure that a new fiduciary standard of care for brokers and investment advisors could work across the industry. Recently, the SEC recommended that regulators create a single, uniform fiduciary standard for brokers and investment advisers. The SEC’s 208-page study that emerged from the Dodd-Frank financial reform legislation urges that a uniform fiduciary standard that puts the clients’ best interest first be adopted for both investment advisers who now adhere to it and broker-dealers who often rely on the so-called suitability standard.


SIFMA also urged the DOL to consider how the proposed rule could limit activity from the capital markets. More costs to large plans could interfere with their ability to participate in swaps, prime brokerage assets, alternatives investing and futures execution. Additional costs could also limit investment choice at small plans and IRAs, SIFMA argued.


“In the midst of other regulatory initiatives in this area, we ask the Department to reconsider this proposal and work with other regulators to ensure regulatory consistency,” Tim Ryan, SIFMA's president and chief executive officer, said in a statement.


SIFMA requested the chance to testify before the DOL about the proposal at the department’s scheduled hearing on March 1 and 2.


SIFMA’s letter comes as the Certified Financial Planner Board of Standards also sent its own letter to the DOL on Wednesday. In that letter, the CFP Board asked for the DOL to expand the term fiduciary under ERISA to better protect plans and their investors from conflicts of interest. The letter also called for the DOL to have no opt out provision for advisors, which would limit its adverse interests exception.


The CFP Board also said it supports the DOL’s proposal to define investment advice to include recommendations on plan distributions.


Lorie Konish
OnWallStreer
February 4, 2011 


Wednesday, February 2, 2011

COULD CHAOS, REGULATION SPARK A GOLDEN AGE FOR ADVISORS? YES! THROUGH A BUSINESS MODEL THAT ENGENDERS TRUST - PROFESSIONAL PRACTICE - WITH A FIDUCIARY STANDARD

PHOENIX - Independent broker-dealers and financial advisors could very well be thanking Bernie Madoff and legislators who passed the Dodd-Frank Wall Street Reform Act in the not-too-distant future.


That’s because the ensuing heavy-handed regulatory policies and general consumer distrust of big investment houses will spark innovation in financial markets and new opportunities for growth.


At least that's how author, consultant and ChangeLabs CEO Peter Sheahan believes it will shake out. He offered up his lemons-into-lemonade hypothesis today during the closing keynote address of the 2011 OneVision: Broker Dealer Conference, citing examples of other industries-- insurance and manufacturing, to name two-- that first chafed under increased regulatory scrutiny only to emerge stronger and more profitable than ever.


"You are experiencing tectonic shifts that other companies in other industries have endured before you," he told attendees. "But the regulation you face doesn't have to be a burden. The companies that are first to accept and respond to the burden and reinvent their processes are the ones that will eventually see dramatic improvements to their margins."


Sheahan's spiel would seem to be a hard sell to an audience of independent broker-dealers and financial advisors who just spent the past two days bludgeoned by the ramifications of new compliance and regulatory issues.


But it seemed to perk up the crowd as he offered story after story of companies and entire industries that faced similar challenges but reinvented themselves. These industries survived and, eventually, thrived.


"The fact that you've been profitable to the bottom of the pyramid, the small investor, is important," he said. "The problem now is that the increased costs of regulation will now rob you of the margins that allowed you to essentially service the bottom layer at cost. But it's important that you keep doing this."


In Sheahan's view, regulation is coming and there's nothing the industry can do about it.


"It sucks," he said. "But you have no choice. Research says to embrace it."


Along with increased regulation on multiple fronts, consumers are angry, confused and almost irrationally disinterested in anyone or any company trying to convince them to invest what money or assets they have left in the wake of the Great Recession.


This again represents an opportunity, Sheahan said. By differentiating themselves from "Wall Street," he thinks independent advisors and firms have a window of opportunity to capitalize on the sour taste left in so many investors' mouths in the aftermath of the economic meltdown, bailouts and quick return to outsized compensation and bonuses.


"Consumers still aren't ready [to resume investing]," he said. "They're still freaking out."


He said independents have about 18 months to profit from the chaos, uncertainty and erosion of trust by positioning themselves-- and offering the products, services and personalized touch-- as the professionals who are "taking care of Main Street."


To make it happen, he recommends financial advisors and their firms invest some thought and collaborative energy among themselves to find interesting new ways to use the customer data they have and the new regulatory measures they're being forced to embrace to find new revenue streams.


"Data could be the source of that opportunity," he said. "What you have, what others in your industry have. This explosion of transparency will create data and give you the opportunity to build analytics around your data."


"Don't look at it as a pain in the neck," he added. "It's a chance to improve the investor experience and tailor it."


During a particularly colorful anecdote involving his wife and an expensive Gucci handbag, Sheahan made the point that consumers are inherently irrational and that's in large part why his wife was willing to spend $1,450 more for a bag that had superior stitching than a cheap lookalike knockoff from Malaysia.


"The point is that she knew the difference," he said. "That's what your industry needs. It needs a story and the stitching that will make investors want to come to you."


This differentiator of quality that resonates in investors' minds more than likely will come from the bottom up, meaning from the pool of existing and potential investors, rather than from on high from wholesalers or even within a particular branch, he said.


"All the top-trafficked websites-- YouTube, Google, Wikipedia, eBay, Facebook -- they all exemplify what happens when human beings are left to do what they do," he said. "They push up’’ ideas to the leaders of the organizations they work for or buy from.


Larry Barrett

OnWallStreet
February 1, 2011