Hybrid Delivery: Can Online Crowdsourcing Portals Coexist - and Complement - Dealing Representatives?
By Jason Park
Technology influences almost every industry you can think of to some degree. One of the trends that we see happening is that the online world is starting to influence the Exempt Market industry.
Once again, the future has not knocked on the door or even bothered to ask any polite questions. It has shown up almost totally unannounced, and like it or not, cousin Eddie is going to be here for a while. In January of 2016, the passing of Multilateral Instrument 45-108 meant that regulated equity crowdfunding would be legal in Canada. Invariably, this means that there is going to be another option that is available now for investors of all backgrounds to invest in private debt and equity without the advice of a Dealing Representative.
Competition is nothing new. There is a commercial that is airing on television recently where the hypothetical clients ask their investment advisor to confirm that if they were to factor the compound interest of the 2% fees that the advisor is paid, that this compensation to the advisor will add up to 30% less for them in retirement. The imagined advisor says to the young couple that he does not think that her math adds up. And the woman in the commercial responds that no, it doesn’t.
Indeed, anyone with a financial calculator and an afternoon with access to an internet connection can confirm that the math is correct (depending on rate of return assumptions). This ad was from a discount brokerage that has been around for almost two decades.
So what conclusions can we draw from a commercial like this? One would be to concede defeat and admit that the service being provided by advisors is not worth the compensation that they receive in return. Another possible conclusion would be to take a little bit harder look at that commercial and to analyze it further….Can Online Crowdsourcing Portals Coexist with Dealing Representatives?
Until the 1980s, when discount brokerages first started to make their appearance and presence known, the commissions that were charged in public markets were exorbitant, which made it very difficult for an average person to purchase a stock or bond on a public exchange. Thanks to technological advances, efficiencies, and competition, the access to the public markets and the fees associated with purchasing and selling of a volume of securities has steadily decreased to the point today where the discount brokers are having difficulties generating profits. Discount brokerages would now be considered a mature industry and access to purchasing and selling securities on the public exchanges is now commonplace for the average person.
The evolution of the public space is a fair comparable to what we could expect in the private space.
According to the Advocis report titled Economic Impact Study of the Small and Medium-sized Business Financial Advice Industry in Canada and authored by PwC in July of 2014, there were 80,000 financial advisors in the Small and Medium Sized Business financial advice segment of the industry, which consists of a possible 12,000,000 Canadian households. Clearly, advisors have found a way to remain relevant alongside discount brokerages.
So, back to our question: Can Online Crowdsourcing Portals Complement Dealing Representatives? Let us examine four areas.
1)Do your interests align with the portal?
The regulatory burden has never been higher than it is currently in the exempt market. There are so many issuers available that Know Your Product (KYP) requirements and the marketing materials being provided by many issuers are a deep cause of concern for both Dealing Representatives and Exempt Market Dealers alike.
Instead of having a message that can change from client meeting to client meeting, imagine an exempt market security recommendation to a client where all the Dealing Representative has to do is simply play them the video and explain the investment summary that has been pre-approved by their compliance team and is sitting on the portal website. The message has been controlled and is an equal opportunity highlighting the facts of the investment.
No need for the nearly impossible task of memorizing the twenty plus products of individual marketing materials verbatim that could be offered to a client. (The Dealing Representative would still have to demonstrate product knowledge by completing and passing an online exam with a score of 80% or higher, that tests their understanding of the product prior to a client meeting where they would be recommending the issuer). And no need to only focus on an extremely small selection of the possible product universe to clients which affects the Dealing Representative’s ability to properly service their clients and to give them the options that they deserve.
What has the Dealing Representative accomplished? A complete and documented picture of KYP due diligence and a compliant and very professional message to their potential client that never changes. This is a winning scenario for the Dealing Representative, the EMD, and most importantly, for their client.
2)The Natural Progression from DIY to a DR
If you have ever turned your television station to HGTV, this particular point does not need too much explanation. Since the beginning of human history, younger people have done it themselves. For some, this works out well. Many do have the ability, the time, and the resources to do exactly that. However, watch an episode or two of Holmes on Homes and you will find out what happens when some DIY in an area where they have no experience. Eventually, they need to call in the professionals.
Imagine an airplane flying through the air. I have had the opportunity to take the wheel at a few thousand feet without ANY knowledge of what I was doing. And it was great fun. But when it was time to land… I decided to let the pilot handle it.
This will be the likely progression concerning retirement savings as well and many of the Do-It-Yourselfers will eventually want help with their landing.
3) Brand Recognition
There are a variety of reasons why people may decide to buy a certain brand over another one. Some commonly cited explanations include trusting in a previous experience – whether personal or by word of mouth, social acceptance, and personal image. At the end of the day, everyone reading this is a human being.
The exempt market space is not a well known industry in Canada and people have a more difficult time trusting what they do not understand. It has never been more important to have a strong and consistent marketing message that brings a company’s brand to the forefront of people’s imaginations and that connects with them on a personal level. Brand recognition is good in a society that places trust in institutions.
4) Profit Sharing
Check to see which Exempt Market Dealerships are offering a profit sharing program with their Dealing Representatives. If the analysis outlined in this article is correct, a successful dealership will require both an online presence and a complement of Dealing Representatives. A fair dealership should reward the people who have built it.
In summary, the evidence of the evolution of the discount brokers suggests that, of course, Dealing Representatives can coexist with online crowdsourcing portals. Further, the evidence also suggests that there is significant opportunity to improve a Dealing Representatives individual business through the assistance of this technology while also increasing the profitability of the Exempt Market Dealer and the foundation of the individual Dealing Representative’s business.
If this analysis proves correct, then it makes sense to take the hybrid approach and to have both a strong online presence and a strong one-on-one presence with all clients. When interests align, great things happen.