In an impaired retail advisory market place, regulatory investor education is likely compromised by its mandate to administer confidence in capital markets and by the distance it places between its education and the point of sale.
Unique insight is a perspective gained from a unique position within a universe and openness is a state of mind which allows you to take up new positions. I was very grateful to be invited, as a guest of IIROC, to the IFIE-IOSCO Global Investor Education Conference in Toronto. I found it fascinating, but I did leave with a number of questions and insights that I did not possess at the start.
But first, how to gain the necessary position that drives insight: super receptiveness combines the mind of a child with the analytical tools of an adult; you absorb, you model, you gain insight, you question and hopefully you answer. In a super receptive state you absorb and question every piece of information as if it is new and judge it without the influence of any prior held view. This is how my insight is driven.
One of my questions is, should regulators be involved in investor education at all? And, if the answer is yes, what should be the boundaries and the objectives of such and to what extent can regulators be regarded as impartial educators?
I ask this because one of the objectives of Canadian regulators is to “administer” confidence in the capital markets, and one way of doing this is to create confidence in the regulator. Education is a way of linking the regulator with the investor, thereby creating the relationship which fosters confidence in regulator and market. But what if this confidence is ill deserved? There is a risk that the objective of confidence will conflict with the necessary objectivity of education.
My concern is that education, not literacy (which was also discussed and can be confused with education), is about imbuing an individual with the tools and the knowledge base on which to make independent decisions. Independent decisions can just as easily result in a lack of confidence in the “financial industry and markets”, which may conflict with a regulator’s role. True education should question the effectiveness of regulation, the fairness and asymmetry of relationships in the market place and the products sold in the market place.
Regulator bounded education concerns the provision of information about regulation, the market, what is bought and sold and how it is bought and sold. In a sense it is closer in form to literacy, but literacy provides no opinion or endorsement of a product, whereas regulator education can cover fairly complex products or arrangement without providing sufficient objectivity. Regulator education can in a sense be a hostage to the regulatory culture: if the culture is bad (limited advisor responsibility, embedded commissions etc.) then the education may well be suspect, and if the culture is good, then education will be less bounded by conflicts of interest.
Part of me feels that regulatory education is a subtle way of reinforcing trust and confidence in the system, which may in itself be a conflict of interest. Education is not the main objective.
I do not have confidence in the current regulation of Canadian securities and investment products: we need best interests standards, we need to get rid of commissions, we need central regulation of all products and securities and we need higher professional standards and greater competition and innovation.
Another question was about the distance between regulator produced information and the point at which advice and transactions were made. There is a definite aversion on the part of regulators to directly pass information to investors that may help them make better decisions. Indeed, much of the conference was spent discussing how to reach and involve adults in regulator sourced education given that this information was not provided to the client during the client/advisor induction.
In Canada’s regulatory culture and structure the consumer is held to a much higher standard, and the advisor to a much lower standard, than say in the UK and Australia. It is therefore much more important that information about regulation and regulatory standards gets to the client in this context. Unfortunately. regulators do not make it clear just what are the boundaries of the retail advisory relationship. I would like to male it clear that under current regulation the investor is responsible for the investment decision and that regulation of the advisor is more or less limited to a simple parameter to parameter transaction framework. I would refer interested readers to Appendix A of my submission to the CSA on best interests standards.
Hence current regulatory education fails to communicate the information needed to help investors make true informed decisions and fails to deliver access to regulator sourced information through the client/advisor relationship (i.e. at the material point of interaction).
My third point (two questions, one point) is that impartial investor education should be about helping investors make rationale and better informed decisions about the services and products they end up contracting for or purchase.
David Wright of IOSCO, in the opening talk of the conference discussed the need to educate investors about low cost, well diversified portfolios and opined that many complex products needed to be banned. In a sense, if the intent of education was to inform the investor about products, costs and the limitations of many of those who deliver services in this area, the message would be to obviate the industry.
If you have an industry that does not have best interests standards, that recommends high cost investments with embedded commissions, that often provides poor structure and diversification, well, you would educate the client to avoid the industry and its products and buy simple, low cost, well diversified, passive structures. Regulators cannot provide this level of impartiality, since this is an impartiality that may well lead to lack of confidence in the system. They are not there to pre-empt market competition, and it would seem, at least in Canada, not even imperfect competition in a market that has asymmetric biases reinforced by regulation. Ergo, regulatory education is by its nature and by its constraints, and given its own objectives and performance measures, impaired.
I think institutional investor education is important, but I think it should be delivered by a separate government body that does not have a mandate (confidence in markets) that may conflict with the message and the objective of education. Regulators still need to be focussed on engendering competition in the market place. In Canada we have the worst of both worlds:
Regulators that, despite recent movement in this area, do not appear to be committed to the type of market competition that would lead to best interests outcomes;
Investor education that supports and does not appear to really question the status quo.