A Major Setback for Retirement Savings: Changing how Financial Advisers are Compensated could Hurt Less-than-Wealthy Investors Most
Authors: Lortie Pierre 
Published: January 2025

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 that offer them higher commissions — and to turn over their sales (or churn) more frequently — even if the recommendations are not in the best interests of their clients. That may seem entirely logical, although studies that investigate adviser behaviour have found surprisingly little evidence that advisers provide unsuitable advice as a matter of course and that other structures of remuneration lead advisers to adopt practices that are better aligned with their clients’ interests. Indeed, research has found that turnover is even higher in unbundled feefor-advice portfolios and that advisers tend to recommend to their clients investments that they, themselves, place in their own portfolio. Nevertheless, one thing arguably more problematic than clients receiving potentially conflicted advice is clients not having access to any advice at all. And based on the experience of other jurisdictions that have ordered fees to be unbundled and instead be structured as upfront fees, that is the result that ends up occurring for investors below a certain income level. In the U.K., after the decision was made to unbundle fees, the number of financial advisers fell from more than 40,000 in 2011 to just over 31,000, and has not recovered. Major banks, meanwhile, cancelled their financial advice services for clients that had only modest assets. The opening of investment accounts worth less than 100,000 pounds fell by half. After Australia required fees to be unbundled, there was a similar effect. There is little to suggest that Canadians would not be left with the same income-related “advice gap” were regulators to require fees unbundled here. Simply put, many clients are unwilling to pay upfront for unknown results. And any reform that causes investors to separate from their advisers, or to never hire one, would be counterproductive to the public policy goals of helping Canadians better prepare for retirement. If it is adviser conflicts that regulators are worried about, there are better ways to address them — for example, the regulatory regime governing fiduciary duty and the potential to enhance the competencies, proficiency and professionalism of financial advisers — than creating a system that results in fewer people providing financial advice, and fewer people willing to seek it.