Ian Russell

January 03 2012
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Thank you, Julie. It’s appropriate that Julie introduced me because she and her firm Investment Advisor played a major role in the study I am going to be talking to you about today.

Ladies and gentlemen, Canadians are going through tough times, and the investment industry is no exception.

Of course, Canadians are resilient. Just look how long we went without hockey!

Now all the investment industry needs is a mediator to turn OUR season around.

We’ve been going through a challenging year. In fact, we’ve been going through a challenging four years, ever since the market collapse.

That’s why I’m glad to have some good news to report. Today, the Investment Industry Association of Canada is releasing the results of a national survey of investors, called The Economics of Loyalty. We learned a lot. Perhaps the most important thing is this: Canadian investors have confidence in their own investment advisors.

Of course, investor confidence does not just depend on investors’ attitudes toward their advisor. It would be nice if it did, based on the findings I’m reporting today.

Investor confidence is based on several things.

It includes confidence in the direction of market trends. If investors are heavily in cash, it does not necessarily reflect concerns about the integrity of markets, institutions or advice. It may simply be uncertainty about the direction of markets and related investment decisions.

Investor confidence also embraces confidence in the integrity of the functioning of markets and soundness of financial institutions. This has been a particular concern in the U.S.; not as much in Canada, given our history of well-regulated financial markets and institutions.

Today I want to focus on confidence and trust in the investing process and advice-giving. This trust and confidence is fundamental and critical, and turns on the investment practice of the advisor, the transparency of the investing process and the relationship with the advisor. This is the aspect of confidence that our survey relates to. The survey confirms that trust in the advisor and investing process is high.

The survey demonstrates that Canadians’ relationship with their advisors is characterized by feelings of confidence, clarity and control. We believe that when clients feel confident and in control that it drives a deeper sense of engagement.

The proof of the level of engagement that advisors have with their clients can be seen in a very concrete form. A large percentage of clients say they would be prepared to refer their advisor to their own friends and acquaintances. In fact, a significant percentage of Canadians do exactly that.

Let’s keep something in mind: Referrals are not given lightly. When you refer someone to an advisor, you are recommending a professional who will have considerable influence over a friend’s hard earned savings. You are telling them to put their financial future in that advisor’s hands. You hardly want to risk a bad experience on your shoulders.

Recommending an advisor is a big decision. And many Canadian investors are making it.

This is especially remarkable when you consider that we are just four years past the greatest financial meltdown in memory.

Obviously, this level of confidence is good news for advisors seeking to expand their clientele.

But it’s also good for investors looking to choose an advisor, based on counsel from friends and relatives – people they know and trust.

It’s good for the market.

And it is a positive verdict on the kind of service that advisors provide their clients and the level of trust they inspire.

A lot of people would be surprised to learn that investors have so much confidence in their advisors. The conventional wisdom is that people have lost confidence in advisors and in the investment process.

But conventional wisdom often consists of a lot of convention, and much less wisdom. Bad news travels fast. Unfortunately, it often leaves truth and accuracy at the starting gate.

Why the common misperception that Canadian investors lack confidence in their advisors?

The facts are that we have seen a perfect storm, composed of market turbulence, low returns, and a few high-profile scandals.

But no one has taken the time and expense to drill down, and get a clear read on investors’ views of their advisors.

We made it a priority to find out. What we found is that most Canadian investors are pleased with their advisors. When many clients refer their advisor to people they know, then you know that’s a clear vote of confidence.

This should be a yellow caution light to regulators: While effective regulation is crucial to efficient capital markets, regulators would be wise to temper the layering on of additional rules and regulations.

Rules can have unintended consequences – and unintended costs. Excessive rules mean excessive costs. And those costs will be borne by the investors.

Reforms are needed. But they have to be accompanied by a careful, thorough cost-benefit analysis before they are implemented.

It’s better for regulators to think carefully about what they prescribe – especially when some proposed new rules and regulations may be aimed at curing a problem that does not exist. Rather than addressing investor concerns, regulators may only be addressing perceptions of investor concerns – amplified by a ubiquitous Internet and a 24-hour news cycle.

I’ll give you some details about the attitudes of Canadian investors in a few moments.

But first let me explain why the survey was needed, and how we conducted it.

Getting the most out of your RRSP is one of the toughest financial challenges for anyone without a good defined benefits retirement package. Investors want financial peace of mind and therefore want to make sure they’re getting the best possible help to achieve it.

Particularly at the premium end of the market, clients prize quality, trust and long-term relationships.

So, how well does Canada’s investment industry stack up in meeting that demand? That’s what we set out to learn.

We partnered with the firm Advisor Impact to conduct a survey to find out specifically what clients value and expect in their financial advisor relationship.

When it comes to measuring investor expectations, experience and attitude, Advisor Impact is the gold standard. Its founder and CEO, Julie Littlechild, is a recognized expert on client engagement and loyalty. In fact, Investment Advisor magazine named her as one of the 25 most influential people in the U.S. Advisor community, in both 2011 and 2012.

Advisor Impact has been studying the Economics of Loyalty in the client-advisor relationship for many years, in several countries. They initiated the Economics of Loyalty study in the

United States in 2008, and replicated it there in 2010 and 2012. They conducted it in both Canada and the U.K. in 2011 and 2012.

Advisor Impact currently conducts this research every year in all three countries.

We launched the Internet-based Canadian study of over 1,000 investors in September 2012. The study included investors who work with a financial advisor and – more than that – made or contributed to the financial decisions in their household. So we’re talking about investors with practical experience in dealing with an advisor. The goal was to find out what they expected from their advisors, and whether they were getting it.

The information we gathered will be helpful to the industry. Most importantly, we wanted to better understand the client perspective in the investing process.

So, what did we learn?

First, Most investors feel their advisors create value.

Over 60 percent of investors feel the value they receive from their primary advisor is “high”. Only 9 percent felt it wasn’t.

Almost two-thirds of clients say they receive high value relative to fees paid. And, let’s be clear about one thing that’s consistent regardless of portfolio size – from those with investable assets from $50,000 to over $1 million. Canadians with portfolios of all sizes believe their advisor delivers high value relative to fees.

And Canadian investors recognize that an advisor’s value to them goes beyond investment returns. More than 3 out of 4 investors agreed that their primary advisor adds value above and beyond market performance.

For the surveyed investors, defining or articulating investment goals is as important as achieving investment performance. The survey found that 64% of clients indicate they are very clear on their financial goals.

Finding Number Two: Most clients have a sense that they have control of their own financial future.

More than 5 out of 6 clients surveyed say they feel that kind of sense of control. And as many feel confident they will reach their financial goals.

Finding Number Three: As I indicated, clients trust their advisor.

Again more than 5 out of 6 investors say they have a high level of trust in their primary advisor. Three quarters trust the firm for which their primary advisor works.

Finding Number Four: Clients consider that they have a deep and engaged relationship with their advisor when he or she does three things.

First, seeks input from the client and incorporates it into investment advice.

Second, works with family members in multi-generational planning.

And third, makes active use of financial and estate planning.

In short, an engaged client considers the advisor at the centre of the client’s financial life.

What is an engaged client you may ask? Engaged clients are more open to advice and investment ideas, and are more active participants in the markets. An engaged client is not only comfortable referring their financial advisor to a friend, family member or colleague, they have actually done exactly that in the previous 12 months.

If you want to get the clearest sense of the level of confidence that Canadian investors have in their advisors, just think about this: What’s the best sign of trust and confidence in a professional, any professional? Whether you would recommend them to the people closest to you. That’s the ideal of client engagement. It is the truest reflection of client satisfaction.

How many investors are prepared to recommend their advisor? More than 4 in 5 investors say they would be comfortable doing that. In fact, it turns out that 1 in 4 clients have referred friends or contacts in the past year alone.

This represents a significant increase from 2011. It signifies a substantial increase in advisors’ perceived value, over and above market performance.

Engaged investors are not just more price conscious, they are more value-conscious – a trait increasingly common in the financial services industry.

They are more likely to want an opportunity for feedback.

They are more likely to have a written financial plan.

And they are more likely to work with a financial advisor who provides a family-based approach, working across generations.

Referrals are not just important to the advisor who benefits directly from them. And not just to the industry. As I mentioned, they are important to growing the investing public. And they are important to building a base of engaged investors. These investors ensure that the market fulfills its functions of providing capital for economic growth and maximizing the efficient allocation of capital in the market. Engaged clients are clearly important to the marketplace. To assist advisors in creating engaged clients by deepening their relationship, the Investment Industry Association of Canada will be working with Advisor Impact to conduct workshops teaching advisors the techniques of client engagement.

In the midst of all of this good news there seems to be one apparently negative result that stands out. Despite the high level of trust in their advisors, only 32 percent of Canadian investors trust the investment industry as a whole.

That was one of the relatively few discordant notes in the survey. It’s also rather puzzling. After all, if 5 out of every 6 investors trust their advisor, and 3 out of every 4 investors trust the firm their advisor works for, how come only 1 in 3 trust the investment industry as a whole?

Well, what we might be seeing here is the difference between personal experience and second-hand information.

When it comes to assessing their own advisor and their own advisor’s firm, investors base their opinion on personal experience. But when they are asked to rate the industry as a whole, they fall back on the only reference points they have – the news media, the Internet, and other sources of second-hand information. So, not surprisingly, that gives them a negative impression.

The media’s job is to focus on events that make news. The legions of investment advisors, doing their jobs honestly, fairly and diligently don’t make news.

But let’s not forget that the Economics of Loyalty survey offers considerable good news – for the industry and for the Canadian marketplace.

Just consider what investors have experienced over the past four years. They have gone through unprecedented financial shocks, market volatility and an extended period of market malaise. They have seen their portfolios take substantial losses and then make significant recovery.

Yet throughout all this market turmoil investors have retained high levels of trust and confidence in their advisors, and derived significant value from the advisory process.

Despite this good news, the challenge remains to do even better. Many advisors in the industry must work to deepen and widen the financial relationship with their clients. This penetration of the client relationship takes investor confidence and the execution of financial decisions to an even higher level. More active market participation strengthens the savings-investment process in our capital markets, and contributes to better growth and job creation in the economy. Advisors can help make this happen – by moving to the centre of their client’s financial lives and delivering financial peace of mind.

Thank you.