Are we all bound to be DIY investors?
It is easy to find victims of bad or unscrupulous investment advisors and write articles about how the industry is stacked against the individual investor. While the financial industry has its fair share of bad apples (and which industry does not?), what is often not reported on is the business of being an investment advisor and how this impacts on you and I.
I am not an investment advisor so I do not pretend to speak from first hand experience. I can, however, observe from analogy from the legal profession (another industry with bad press, erosion of monopolistic knowledge due to the internet and members conducting a lot of navel gazing at a business model in need of updating) and from the comments of many friends and colleague in the investment industry.
First, simple observation tells you that the smart money is moving financial intermediaries up the food chain, t0 clients with more assets under management and requiring more holistic approach to personal finance. Generally, this has resulted in leaving the retail market to lower paid and lower skilled staff located at branch level or your pure sales person cloaked as an “advisor.” As you may have observed, most bank branches now have multiple staff who can sell mutual funds. When I first started investing more than a decade ago, it was rare to have more than one staff qualified to sell mutual funds in branch.
Also observe recent mergers and acquisitions pattern of the larger financial institutions. RBC bought Philips, Hager & North, known for more upscale clients and managing institutional pension plans. Manulife purchased Berkshire -TWC Financial Group, a niche wealth management firm. There is a pattern to these acquisitions: the shrewd financial institutions (Manulife’s recent problems aside) are chasing the high end of the market and leaving the lower end of the market to be serviced, but not necessarily advised, by front-line sales staff rather than advisors.
There may be many reasons for this shift. Certainly, the concentration of wealth in generally older households means bulking up staff to chase those markets. Discount brokers have created a race to the bottom on retail pricing. But the other mostly unspoken reason is financial institutions do not make enough money servicing the middle class household and this is as much a comment on the financial institutions as it is on the general public. Statistics Canada reports only a third of all households contribute to their RRSPs with the total amount contributed constituting only 6% of total contribution room available.
Anyone who runs a business knows there are two primary ways to make money: (i) high quantity, low profit margin, short sales cycle, poor customer service due to low margin; or (ii) low quantity, high margin, high sales cycle, good customer service. The investing market is bifurcated between retail and high net worth/institutional. You cannot apply the same product and pricing model to both markets.
Thus, if a financial institution wants to play both markets, it has to pursue two different business models. For the retail market, the natural inclination to put more sales rather than advisory staff to sell product (and pumping product is key) since you have, relatively speaking, a high quantity, low margin market (there are exceptions to the rule. There are wonderful advisors who remain in the retail space). For the high net worth market, the natural inclination is to retain highly-skilled advisors to sell advice; many high end investment advisory firms actually do not manage client money. They outsource that to professional managers and they earn their fees engaged in the planning process, hand-holding clients and providing advice.
The situation is not dis-similar in the legal industry. How many people buying or selling a house have spoken to their lawyer more than once or twice during the course of the transaction? Typically, a vendor/purchaser deals mostly with the law clerk. This is because providing real estate services for the retail market is a high quantity, low profit margin business and most clients receive service accordingly (at least in large urban regions where competition is fierce and with frequent price wars). A lawyer once remarked that he lost money if he had to speak to a client more than two times during the course of a transaction. You get what you pay for in life.
What this means for the average investor is, even if an advisor is used, one should be more self-reliant and self-educated about personal finance since, despite the rhetoric, the industry understands that the retail market is a low margin market (relatively speaking) and will deploy resources and staff accordingly.
Is this situation unfair? Of course it is not. Ideally, everyone should be accorded the same level of service and advice regardless of assets under management. But you can’t regulate fairness (despite the government’s best attempts). For us non high net worth households, perhaps the solution is to look at investment advisors more as partners than a top-down advisory relationship. Use them as sober second thoughts on investment ideas. Demand they review your investment ideas. Ask for research. In other words, be active in your own personal financial lives.