A new survey from Ernst & Young finds that while Canadian investors recognize the value of professional investment advice, many are concerned their advisors might be picking their pockets.
According to the EY Global Wealth Research Report, roughly forty per cent of respondents say they are concerned about hidden costs when working with their wealth managers.
The survey also reveals that one in five Canadian investors plan to switch wealth management firms in the next three years, citing investment performance and changes brought on by the pandemic.
Despite the high level of mistrust, the survey found three-quarters of Canadian investors believe their advisors provide value for the fees they are aware of.
Advisors have been reporting an increase in clients since the onset of the pandemic last year, but the need for professional investment advice has been growing over the past two decades as more and more company pension plans transition from the predictability of defined benefit (DB) to defined contribution (DC). DC plans direct regular employee and employer contributions to third party money managers, which are invested at the discretion of the employee.
Company pensions of any kind have been dwindling over the years, leaving individuals to fend for themselves by socking their retirement savings in self-directed Registered Retirement Savings Plans (RRSP) and Tax-Free Savings Accounts (TFSA).
As the need for professional money management grows, many of the suspicions are well founded. For at least two decades studies have shown Canadians pay the highest investment fees in the developed world and many of those fees have been banned in other countries.
It was just last month that the Ontario Securities Commission announced it will join other national regulators in banning deferred sales charges (DSC) when money is withdrawn from mutual funds before a set date.
Regulators have been slow to act on other fees that are prohibited in other countries such as trailing commissions, where advisors receive annual commissions from mutual fund companies for selling their funds. The trailer fees, as they are also termed, are hidden in the broader annual fee imposed by the mutual fund company based on the amount of money invested in the fund called the management expense ratio (MER). Mutual fund companies are not required to disclose trailing commissions, which raises question over whether the advisor is recommending a fund because it is best for the client or the advisor.
Getting investment fees under control in Canada has become a game of cat-and-mouse as mutual fund companies find new and innovative ways to fleece investors while regulators drag their heels on reform.
According to the EY survey, millennials and investors in their forties who need professional money management the most trust the investment industry the least. It finds 56 per cent of respondents expect to use more digital and virtual tools like robo-advisors and chatbots but still recognize the need for qualified human advisors.
As more options open up for investors such as passive exchange-traded fund (ETF) portfolios, the survey also finds half of Canadians prefer to use a single-source financial service provider.
That puts the onus on the investment industry to foster lifetime relationships with clients by giving them what they want: hybrid passive/active investment strategies, low fees and transparency.