Finding ways to serve the mass market

It’s not just banks and doctors. As regulators demand greater transparency, and robos and online brokerages put pressure on advisor fees, the industry has rushed to win wealthy clients from all walks of life whose complex needs justify the fees they pay. Where does that leave advice for clients who are less well-off?

There are trillions of reasons for the obsession with the HNW segment. According to Investor Economics’ Household Balance Sheet Report 2019, only about 10% of Canadian households had investable assets of more than $500,000 — but this small group held almost 87% of the country’s $4.4 trillion in financial wealth.

Fee compression has pushed advisors to wealthy clients, but the pressure is coming from both sides, says Paul Morford, CEO at online dealer platform Agora Dealer Services Holding Corp. in Toronto. Multi-family offices and brokerage firms have been lowering limits for HNW clients as new technology makes it easier to serve them. He expects this trend to continue, cutting into the high end of the mass affluent market while robo-advisors are “nibbling at [advisors’] heels” on smaller accounts.

“The space is really getting squeezed,” he says.

Very few investors are equipped to be self-directed through an online brokerage, says Kendra Thompson, consulting partner at Deloitte in Toronto. This leaves most Canadians in the mass segment in a kind of no man’s land for advice.

“They’re often getting fairly generic or repetitive advice at a high fee, or they’re getting almost no advice and kind of out in the wilderness for a low fee. That’s the binary tension,” she says.

So, what happens to advisors who miss out on the finite HNW pool? And what about the 86% of Canadian households with less than $250,000 to invest, who don’t meet minimum account thresholds?

Smaller accounts have often been pushed to call centres or bank branches. Now, they’re sometimes being nudged to in-house robo-platforms. Advisors don’t necessarily want to get rid of these accounts but they face pressure from dealers, and many brokerages penalize advisors for taking small accounts.

“Now these dealers are starting to look at that space and go, ‘What can I do for these people? We don’t actually want to lose them,’” Morford says.

While traditional options for serving smaller accounts, such as mutual funds with deferred sales charges (DSCs), are being phased out (see “An end to DSCs”), new technology and fee models are emerging. Advisors will need to take on more small clients, and provide more value to all clients, to maintain current revenue.

The abrupt shift to remote work in response to Covid-19 has forced advisors to radically adapt their practices. It may be the nudge some advisors need as they figure out how to serve clients more efficiently.

Automating low-value tasks

Physical distancing has required advisors to adopt communication tools such as video conferencing, and market swings have forced many to execute transactions remotely.

“I think this is going to push forward the acceptance of various technological tools,” says Guy Anderson, senior investment advisor and financial planner with Aligned Capital Partners Inc. in Toronto.

Most advisors at his firm were already using digital wealth manager Nest Wealth’s onboarding platform. After a brief conversation to determine whether the client is a fit, he sends them a link to complete largely pre-generated forms; the account can be opened in a few minutes.

“I don’t have to physically drive to see anyone. I don’t have to print any forms. I don’t have to mail it to them. Even [know your client] updates I can send through DocuSign,” says Anderson, who has no minimum account threshold for clients.

“Anything and everything that we do now can be done in a matter of minutes as opposed to hours. That really reduces the amount of time it takes to service a client and, therefore, the profitability of certain clients.”

Jeff Thorsteinson, Agora’s chief operating officer, says advisors must distinguish between high- and low-value tasks in order to remain profitable.

Advisors can automate the repetitive, administrative work, like driving to clients for signatures and rebalancing accounts — work that’s necessary but perceived by the client as having little value.

“We believe that, over time, advisors are going to need to have twice the assets just to make the same income they earn today,” he says.

The only way to manage that growth is with a scalable technology platform to handle the more mundane tasks, he says.

Many firms are investing in proprietary customer relationship management products or white-labelled platforms for their advisors.

David Gunn, country leader for Edward Jones Canada in Toronto, points to back-end investments the firm has made. Getting rid of data silos has allowed a retirement planning tool to communicate with an insurance planning tool, for example, and saved hours of data entry. The time Edward Jones advisors need to spend preparing for annual reviews with clients has been reduced by at least half, he says.

Sam Febbraro, executive vice-president at Investment Planning Counsel in Toronto, says the pandemic has hastened the firm’s adoption of its advisor platform to allow for remote work and client interaction. Clients can review and confirm know-your-client updates digitally, while securities advisors use Insight360 to more efficiently build and customize client portfolios. The firm’s onboarding is largely automated.

“Something that would take three hours now takes a few minutes,” he says.

Jean-François Démoré, partner and certified financial planner with Innova Wealth Management (of Aligned Capital Partners) in Sudbury, Ont., says advisors can also communicate at scale.

Mail merges allow advisors to craft personalized emails for buckets of clients when the content is the same. It’s one way to maintain constant communication with clients while replacing the need for individual phone calls all the time, he says.

Managing investments

Bucketing can also work on the investment management side. Démoré uses pooled funds he manages on a discretionary basis in order to more efficiently manage client portfolios.

“We’ve built a product that meets most clients’ risk tolerance for somewhere between 50% and 70% of their investable assets. It’s basically a balanced fund,” says Démoré, who became a discretionary manager in part to scale his business. He started his practice without an account minimum, but has slowly raised it to $250,000 for fee-based compensation.

Rather than making trades for individual clients, adjusting the pooled fund automatically propagates the portfolios of all clients in the fund.

“I’m not spending time on the administrative headache of conducting trades in my book of business,” he says. “I’m spending the time on research and I’m getting the actual decision right, as opposed to getting the decision executed.”

Agora’s dealer platform does all the calculations for every client account that’s in a model portfolio, automatically rebalancing to benchmarks without advisor or client intervention.

Anderson says his product shelf contains about 20 primary products from five go-to firms. He designates only a few days per quarter to meet with wholesalers so he can “blitz” the product pitches.

“I try to limit the shelf so that time is dedicated to clients as opposed to just meeting with sales guys,” he says.

Low-cost balanced funds are making it easier for advisors to stop managing investments altogether. That’s what David O’Leary, founder and principal at fee-only financial planning firm Kind Wealth, has done. He charges clients a monthly retainer for planning advice, with the investments left to a robo-advisor or online brokerage.

O’Leary says the upfront planning and monthly retainer fees vary depending on the client’s complexity. A client at the low end might pay $1,500 up front and $150 per month. As assets grow, clients could end up paying less than they would under a fee-based model.

O’Leary requires a contract with the client but little else in the way of paperwork.

“We waste no time on compliance, on regulatory, on administration of the investment,” he says. Most clients choose the Wealthsimple for Advisors platform, which allows him to look at their accounts, but with the advisor compensation set to zero.

“It does mean that you can take on more clients,” he says.

The challenge may be clients’ comfort with paying upfront costs, rather than the more disguised embedded commissions from funds.

“The fact is most people don’t want to pay $500 or $1,000 to have a proper financial plan laid out,” says Laurence Booth, CIT chair in structured finance at the University of Toronto’s Rotman School of Management. “That was the big advantage with deferred sales charges on mutual funds.”

But many in the industry maintain that advantage has diminished with a long-term regulatory trend toward transparency. Consumers are becoming more aware of fees, helped in part by aggressive advertising from online brokerages.

“As an advisor, that’s your weakness if you are utilizing models that are less transparent or have conflicts of interest,” O’Leary says.

Part of the problem is a regulatory regime that covers securities trading but not financial advice, encouraging compensation tied to investments. Clients “end up paying for advice all the time when they really only need it once in a while,” Deloitte’s Thompson says.

“There’s a lot of pressure on the industry because the average Canadian might only need in-depth planning or support for six to eight major milestones.”

As Booth puts it, “It’s a very difficult business to make your unitholders better off and for the advisor to afford a reasonable standard of living without charging those fees. Ordinary investors are getting smarter about that.”

As DSCs die out, there’s an opportunity for a broader decoupling between compensation for investment management and for other services. Démoré says a portion of the marketplace either wants to self-direct via low-cost ETFs or “couch-potato investing.”

“What they’re lacking are the retirement and estate plans, and all the other pieces,” he says.

He’s started offering hybrid and tiered options for clients who only want financial planning, or whose assets don’t meet the threshold for the assets under management (AUM) compensation model. Those clients can pay for a retirement plan à la carte. The plan costs $1,500; reviews, at the client’s request, cost $500. He also offers general portfolio reviews billed on an hourly basis.

Another option is to charge a flat fee for planning and then manage investments for a lower percentage of assets — half the standard 1%, O’Leary says. This would disaggregate planning and investment management.

O’Leary also recommends the monthly retainer model as a succession tool. Junior advisors can charge a planning fee to younger clients who don’t meet asset thresholds. It’s a way to establish relationships with entrepreneurs or younger people with good income but few assets, charging a price at which the advisor can afford to serve them. The client can be converted to an AUM pricing model as their assets grow.

“Now you’ve got your next generation of planners serving your next generation of clients in a model that allows them to be profitable from the get-go,” O’Leary says.

No client left behind

Many advisors also talk about a duty to provide accurate, tailored advice to those without a lot of money — a kind of Hippocratic oath for finance. Fortunately, this is becoming easier.

Gunn says Edward Jones encourages advisors to view prospects as clients for life.

“Smaller accounts that I started with grew quite rapidly, from a $10,000 account very quickly to a $200,000 account or a $300,000 account,” says Gunn, who worked as an advisor in Alberta in the 2000s.

Today, the firm pays new advisors a salary in their first four years; it declines gradually based on assets gathered. This allows advisors to focus on opening accounts and building relationships with clients, Gunn says, rather than only on winning large accounts.

While grids at some brokerages mean advisors aren’t paid to serve clients with account balances below a certain amount — providing a strong disincentive no matter how efficiently the client can be served — independent dealers may offer more leeway.

“I can onboard a small-asset client and still make some money to compensate my time, but I don’t need to make a lot,” says Anderson, who’s been involved with pro bono work through the Financial Planning Association of Canada.

O’Leary, who has also done pro bono work for people hit by the economic fallout from Covid-19, says advisor compensation based on a percentage of the client’s AUM risks excluding most Canadians.

“It feels as if we’re failing society if we’re all chasing 5% of the richest Canadians, and 95% of Canadians are getting no help,” he says.