A Major Setback for Retirement Savings: Changing How Financial Advisers are Compensated Could Hurt Less-than-Wealthy Investors Most

40 Pages Posted: 6 Jul 2016

Date Written: April 1, 2016

Abstract

If regulators were to simply outright prohibit Canadians with low and middle incomes from seeking financial advice, it would obviously constitute a massive setback for individual wealth accumulation and, ultimately, for the economy. In Canada, after all, the well-being of a large proportion of retirees relies heavily on their voluntary personal and private wealth accumulation, in part due to the shrinking proportion of Canadian employees covered by a defined-benefit pension plan. As it is, between a quarter and a third of households of all income levels not covered by a defined-benefit plan are not set up to retire comfortably. And yet, currently, regulators are entertaining a change to the financial services industry that will almost certainly have the net effect of keeping the vast majority of Canadians from accessing financial advice. It is not quite a ban, but given the effect it will have, it almost could be. The role of financial advice is pivotal in helping people prepare for retirement. Evidence shows that the average individual’s knowledge of basic financial products and concepts is quite limited. Research indicates that Canadian households using a financial adviser to assist in saving and investment matters and plan their retirement accumulated 1.58 times as much wealth as did non-advised households after four to six years; after 15 years, that had increased to 2.73 times. That has an effect on the rest society, too, since wealthier retirees enjoy a better quality of life, are less burdensome on government income supplements and contribute more to the economy. One thing that could prove immensely counterproductive to helping Canadians access financial advice to better prepare for retirement is the proposal, being considered by regulators, to unbundle adviser fees from financial products. The rationale for the move is compelling: If advisers receive different commissions depending on the financial products they convince their clients to purchase, the advisers are prima facie in a conflict of interest situation. There is an incentive for them to recommend products.

Keywords: retirement savings, financial advice

Suggested Citation

Lortie, Pierre, A Major Setback for Retirement Savings: Changing How Financial Advisers are Compensated Could Hurt Less-than-Wealthy Investors Most (April 1, 2016). SPP Research Paper Vol 9, Issue 13, 2016. Available at SSRN: https://ssrn.com/abstract=2804696

Pierre Lortie (Contact Author)

Dentons Canada LLP ( email )

1 Place Ville Marie
Montreal, Québec H3B 4M7
Canada

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