Sometimes we all just need a little advice—especially when it comes to our investments.
On the topic of investment advice for capital accumulation plan (CAP) members, there are as many meanings of advice as there are fluctuations in the markets. The problem stems from the word itself. I don’t think there’s a crystal-clear definition of what advice is,” says Nancy Campbell, marketing director, group savings and retirement solutions, with Manulife Financial. “If our industry could come to some common consensus, then responsibility could be more clearly articulated.”
For most of the pension industry, crossing the canyon from education to advice is a matter of details. “To me, advice is when you tell somebody specifically what they should do in their circumstances,” says Cheryl Neighbour, executive director, operations, with the University of British Columbia (UBC) Faculty Pension Plan. “Education is providing enough information so that they can make their own decisions.”
However, what may seem like investment information to one person may be interpreted as advice by another, says Ross Gilbert, a pension principal with Morneau Sobeco. “It’s very much dependent upon your view of what advice actually is.”
Held Responsible
And who should be responsible for providing that advice is another issue. Under the CAP Guidelines, the plan sponsor is not mandated to provide financial advice to plan members. “It is not in legislation, so [the guidelines] don’t really have any legal binding authority,” says Brendan George, senior vice-president and chair, retirement committee, with Aon Consulting. He adds that most in the industry would see the guidelines as best practices.
Section 1.3.1 of the CAP Guidelines states that the plan sponsor is responsible for “providing investment information and decision-making tools to CAP members.”
But CAP members, too, have responsibilities. They are accountable for making their investment decisions. They should also, as noted in Section 1.3.3, “consider obtaining investment advice from an appropriately qualified individual in addition to using any information or tools the CAP sponsor may provide.”
However, it’s a sad state of financial affairs that those who need investment advice aren’t necessarily receiving it. “We don’t feel the plan sponsor should be giving advice, but we do provide lists of financial advisors that have been vetted by [our consultant],” says Neighbour. “While we feel it’s up to the member to get the advice, we provide some means [so] that they can speak to people who we feel are qualified.”
“To me, investment advice is very important for the typical 80% of plan members in a defined contribution (DC) arrangement where they don’t have any defined benefit (DB) plans (besides maybe the Canada Pension Plan), so it’s the right thing to do,” says George. “I think people acknowledge that most members need help.”
It may be the right thing to do, but it isn’t that easy. “In order to give true advice, you have to have the entire picture of an individual’s financial situation,” says Jill Purcell, senior investment consultant with Watson Wyatt Worldwide. “A service provider simply cannot do that. Nor can a plan sponsor, unless you spend a whole lot of time with someone and they open up fully to you on their entire financial situation.”
And who’s to say the advice will be consistent? “The offering of financial advice can be a slippery slope,” says Gilbert, “since it’s virtually impossible to guarantee that there’s going to be a consistent level of financial advice provided to every single employee of a given firm or organization.”
Committed to the Task
Most plan members don’t even know where to begin. “Finding a good [financial advisor], like finding a good doctor—[it] takes time,” says Purcell. “And it takes trust, research and commitment.”
Commitment that the average plan member just doesn’t have—or doesn’t care to have. “There may be 3% of DC [plan members who] want to be able to make their own investment decisions,” says Neighbour. “Ninety-seven percent of people would be happy to have somebody else do it for them.”
While plan members might be burdened with investment choice and research, employers, too, have their issues. Not only do they spend time researching a financial advisor, they also have to find solutions to getting members access to advice.
Communication is another issue. “If a company truly believes that advice is required, then the communication efforts will have to be tailored accordingly,” says Gilbert. This would involve explaining how the financial advisory company operates (including the associated fee structure), how to gain access to a financial advisor, what the financial advisor is and isn’t responsible for, and any legal disclaimer information. “[This] would allow the plan sponsor to feel more comfortable that they’re not going to be liable for less-than-appropriate investment advice.”
But if litigation in the U.S. is any indication, it’s the legal issue that continues to weigh heavily on employers’ minds. “It’s unfortunate that the concern over legal liability and potential issues down the road has stopped a lot of providers, sponsors and consultants from doing what I think is best for the member,” says George. “My feeling is that they just haven’t wanted to take on one more responsibility, in terms of selecting a company or individual to provide investment advice to members, where the plan sponsors seem to have made that decision and could be held ultimately responsible if there were any issues.” George says there are employers that do offer investment advice, but it’s a relatively small number.