Banking on our lack of financial savvy….

The title of the post is taken from a Jonathan Chevreau article in the National Post.   Chevreau is one of the better personal financial journalists, in my opinion, always keen to air both sides of the argument and rarely if ever does he make that ill judged move, of many financial journalists, towards becoming a “financial adviser” in all but name.  

He is correct in questioning the role of financial services in determining the shape of financial literacy and the viability of education per se in enabling individuals to make informed financial decisions.

However there is a point that he and many other journalists are not bringing out.  This is the fact, that under Canadian regulation of retail financial services in the advisory segment, the consumer/investor is responsible for the investment decision.   Now this does not just mean that they are responsible for saying yes to what the advisor has recommended, but for actually delivering the parameters (the suitability process) on which the advisor makes their product recommendation and quite a bit more.

The investor is responsible for delivering the suitability parameters: risk preferences, investment objective, time horizon.  The advisor is merely responsible for carefully recording the parameters, confirming them with the client, recommending a product or transaction that matches those parameters and for providing sufficient information for the investor to match their parameters with that of the product.  This is no more than a painting by numbers exercise.

The investor is therefore responsible for determining the risk profile of the product (because they determine the parameters), the amount to be invested, of making sure it fits with their other assets and financial position and of conducting the necessary research to make sure they understand the product, their portfolio and the investment universe as it relates to them.  

As far as regulation is concerned, the advisor merely sells them the product based on the parameters laid down by the investor.  The minimum standards of the industry are those defined in the KYC, and the KYC is insufficient for an advisor with a fiduciary type responsibility to deliver effective wealth management.

Investors need to be told that their so called advisors are not advising them what to do, but are there to sell them products that match their parameters.   They cannot rely on their advisors to take care of the overall financial needs and regulation will not enforce any such responsibility.

In other words, quit talking products and markets and education and cut to the chase.  Investors need to know just how much they are responsible and how little the advisor is in the transaction relationship.  Only then will investors appreciate the importance of education and whether or not they need a true fiduciary type relationship to take care of their financial needs and assets.  

But all this talk of financial literacy is missing the vital point.  Consumers are unaware of the true nature of their relationship with their advisor.  Besides, in a pure minimum standards transaction relationship, product/transaction advisors are not responsible for educating the investor: this is the investor’s responsibility.   That the financial services industry appear to be shaping the education that may end up determining the investor’s decision is creating a feedback loop in terms of responsibility, but without accountability.   A kind of have your cake and eat it too outcome!

Leave a Reply