Financial advisors are taking of stock of regulators’ warning about pay-to-play awards and those based on sales targets, with many praising the fresh scrutiny.
Earlier this month, the Canadian Securities Administrators (CSA) and the Canadian Investment Regulatory Organization (CIRO) sent an email to registered firms and representatives, warning them that referencing — or merely participating in — awards based on sales, assets under management (AUM) or revenue generation in client-facing interactions would be considered “a compliance deficiency.”
The email mentioned references on websites and LinkedIn profiles, but the CSA declined to comment on further examples of client-facing interactions, saying that doing so could constitute legal advice.
“We would encourage firms to review the rules with their legal counsel,” wrote Ilana Kelemen, senior strategic advisor with the CSA, in an email.
Despite being framed as a “reminder,” the regulators’ warning email seems to have caught the industry off guard, given the proliferation of advisor award programs in recent years.
Nonetheless, both investor advocates and financial advisors said they were pleased with the initiative.
“I’m very supportive of the position the regulators have taken on this issue,” said Jean-Paul Bureaud, executive director and CEO of FAIR Canada. While there’s nothing wrong with recognizing achievement, he said, awards of the kind described by the regulators “are potentially misleading, and may suggest the advisor is more proficient and capable in terms of serving the client than they really are.”
David O’Leary, founder and principal of Kind Wealth in Toronto, is familiar with the minutiae of award programs. He used to chair the Morningstar Canadian Investment Awards Committee — a program that shuttered after the OSC issued guidance in 2015 stating that fund managers can only advertise awards that are based on quantitative criteria. The Morningstar awards also considered qualitative criteria.
While O’Leary had expressed concerns about the OSC’s 2015 position, he said he supports the CSA and CIRO’s warning on advisor awards.
“If you want to properly assess an advisor, it has to have a qualitative component,” O’Leary said. “If it’s quantitative [only], then it will inevitably end up just relying on AUM and number of clients served, rather than whether an advisor is doing a good job.”
He added that comparing advisors is more difficult than comparing fund managers due to differences in client needs and characteristics.
As as result, “many of the awards have no grounding in whether those advisors are doing a good job for their clients, and are overwhelmingly about how well [advisors] are able to sell,” he said. “They do far more damage than they do good.”
Darren Coleman, senior portfolio manager, private client group, with Coleman Wealth in Oakville, Ont., agreed that comparability is an inherent challenge with advisor awards.
“Trying to use rankings and other things to separate people or demonstrate skill is a very tricky thing to do,” said Coleman, who has won several in-firm and third-party awards. “All these rankings are problematic anyway, because there are just so many variables upon which someone would choose an advisor.”
He used the analogies of choosing a movie based on box office success, or choosing a restaurant for dinner based on revenues. “You could say McDonald’s makes a lousy hamburger, yet they’re highly successful, right?”
Rona Birenbaum, founder and president of Caring for Clients in Toronto — and a past award winner — supports the regulators’ efforts at minimizing confusion for clients.
“This policy seems to be about … raising the standard of what it means to be a financial advisor or planner, and we want consumers to be able to assess their options in an objective manner, based on criteria that reflect what consumers want today — not what impressed them 25 years ago, like AUM,” she said. “If you ask consumers for a list of the attributes they want in their ideal financial advisor, ‘talented salesperson or marketer’ likely wouldn’t make the top 10.”
Coleman agreed the policy should cause advisors to revisit their communications with clients and prospects.
“The advisor has to be able to articulate their value proposition, in my view, without representing past investment performance — because that’s not repeatable,” he said.
And now that an advisor can’t rely on past accolades, “you’ve got to figure out some other way to demonstrate to the client that you can be a good choice. [The award restriction] just raises the bar a little bit on how well we do that.”
Not everyone agrees the regulators hit the mark.
Rob Pollard, senior portfolio manager, private client group with The Wyndham Group in Toronto, said he agrees that pay-to-play and sales-oriented awards can mislead clients: “An award should never be based on production, because that creates bad behaviour.”
But including AUM in the warning “doesn’t make a lot of sense, because if you’re good, then you’re probably going to be growing,” Pollard said.
He argued that higher AUM allows an advisor to hire more staff with more varied skillsets, ultimately improving client outcomes. “I think [high] AUM is a sign of a well-run team.”
As a fee-only planner, Birenbaum sees the issue differently, saying that AUM and asset growth rates “are not correlated to a great client experience or above-average financial outcomes.” While she acknowledged that a high AUM can signal a practice’s stability, “you can have a successful business at a much smaller scale than the largest in our business.”
Pollard said he believes industry awards, done right, can motivate advisors to improve by fostering healthy competition.
He said some award programs “do pretty good research. They ask you a lot of questions,” he said. And when the list comes out, “you see what the [winners] are doing and you say, ‘How do we build a better team? How do we provide a better service?’ Those rankings, they motivate you to do that, which is only in the client’s best interest.”
Everyone interviewed for this story, in fact, felt that advisor awards can be executed well.
“It’d be great to see awards that focus on what really matters, which is how well advisors are serving their clients,” Bureaud said.
But he hopes the conversation will evolve beyond the merit of awards themselves: “I wish the debate was more focused on delivering good outcomes for clients, and the things we can measure in terms of those outcomes.”
Practically speaking, firms are beginning the job of scouring advisor profiles and websites to make the necessary changes. Coleman said he’s not concerned about removing award references from his online profiles.
“Obviously, we like to tell clients we won the Oscar, the Tony and the Grammy,” he joked. “But I don’t know how much stock clients put into [industry] awards. At the end of the day, I’d rather my client keep choosing me. That, ultimately, is the right form of recognition — that the clients think we can do the job.”