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1 Sound Advice INSIGHTS INTO CANADA'S Financial Advice INDUSTRY. July 2014. A PwC study on Canadian small and medium-sized businesses providing Financial Advice Sound Advice INSIGHTS INTO CANADA'S Financial Advice INDUSTRY. Economic Impact Study of the Small and Medium-sized Business Financial Advice Industry in Canada JULY 2014. AUTHORS SPECIAL ACKNOWLEDGEMENTS. Stephen Martin, Partner, Consulting and Deals, HDR Corporation for conducting comprehensive economic impact PricewaterhouseCoopers LLP assessment of SMB Financial Advice industry in Canada: Byren Innes, Senior Strategic Advisor, n Dennis Bruce, Senior Vice President, HDR Corporation PricewaterhouseCoopers LLP Co-Author n Alex Kotsopoulos, Senior Economist, HDR Corporation Davis Yoo, Senior Advisor, n Ewa Tomaszewska, Principal Economist, HDR Corporation PricewaterhouseCoopers LLP Co-Author James Mancini, Senior Associate, Investor Economics for providing key Financial Advice and PricewaterhouseCoopers LLP Co-Author SMB Financial advisor industry data and analysis used to establish SMB Financial advisor profile, analysis and trends: n Guy Armstrong, Senior Consultant and Managing Director, CONTRIBUTORS.

2 Investor Economics Rajendra K. Kothari, Managing Partner, GTA, n Keith Sj gren, Senior Consultant and Managing Director, National Asset Management Leader, PricewaterhouseCoopers LLP. Consulting Services, Investor Economics John MacKinlay, Partner, Financial Services Advisory Lead, n Benjamin Reed-Hurwitz, Analyst, Investor Economics Consulting and Deals, PricewaterhouseCoopers LLP. Stuart Smith, PricewaterhouseCoopers LLP. Julia Bakker, Manager, PricewaterhouseCoopers LLP. Emily Zhang, Associate, PricewaterhouseCoopers LLP. PwC refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

3 Contents Executive Summary 6 The Small and Medium-sized Business Background 1 Financial Advice Industry: Definition, The Financial Advice Industry in Canada 1 Opportunities and Challenges Study Objectives 1 Overview 51. Approach 2 Small and Medium-sized Business Summary of Key Findings 2 Financial Advice Industry Definition 51. Conclusion 5 Consumers of Financial Advice 58. Implications of Industry Trends and Proposed 1 Introduction Regulatory Changes 61. Background 7. Opportunities 65. Study Objectives 7. Critical Success Factors 68. Methodology and Approach 7. Limitations 8 7 Economic Impacts of the Small and Medium-sized Business Financial Advice Industry 2 Industry Profile Overview 71. Overview 9.

4 Employment Contribution 72. The Financial Advice Industry in Canada 9. GDP Contribution 73. Financial Advisors in Canada Industry Structure 10. Tax Revenue Contribution 73. The Small and Medium-sized Business Spinoff Benefits and Multiplier Effects 74. Financial Advice Industry in Canada 11. Summary 76. 3 Distribution Channels and Business Structures Overview 13. Appendix A: Definition of Terms 79. Distribution Channels 13. Business Structures 16 Appendix B: Economic Impact Assessment Study 1 Introduction 87. 4 Regulatory Framework Overview 19 2 Study methodology and data 89. Mutual Fund Licensing and Regulation 19. 3 Economic impact results 98. Investment Licensing and Regulation 20. Life Insurance Regulation and Licensing 22 Appendix B1: Canadian Regulatory Trends and Cost of Compliance 27 Non-extrapolated economic impact results 105.

5 Global Jurisdictional Regulatory Overview 32. Appendix C: Advocis Economic Impact Survey 109. 5 Impact of Financial Advisors on their Clients Appendix D: Financial Advice Process 116. Overview 41. The Role of a Financial Advisor 41 Appendix E: Bibliography 118. The Components of Financial Advice 43. The Financial Advice Process 44. Benefits to Clients 44. Quantifying the Impacts of Advice on Client Net Worth 48. Executive Summary Background Financial Advisors provide a range of services to clients through Financial Advice industry, comprising approximately 80% of the the provision of investment, retirement and risk planning and total number of Financial It includes Financial Advisors Advice as well as the sale of one or more Financial products; spe- operating out of independent mutual fund and securities dealers, cifically, mutual funds, securities and life and health insurance.

6 Independent insurance agencies, exclusive agents of insurance They sell products through a variety of distribution channels, companies and full service securities brokerages that are not ranging from Canada's largest banks to small local businesses affiliated with large Financial institutions ( credit unions and with a single employee. the Big-Six banks). The small and medium-sized business (SMB) Financial Advice industry segment is an important component of the broader The Financial Advice Industry in Canada The Canadian Financial Advice industry is bracing for significant have already been adopted in the UK and Australia. Such changes change. Global economic volatility has led to investor uncertainty have, in some cases, had unexpected consequences on the small in equity markets.

7 Recent periods of low savings rates and the and medium-sized (SMB) Financial Advice segment of the industry. trend away from defined benefit pension plans have heightened Here in Canada, Financial Advisors in the SMB segment are anxiety about preparedness for retirement, especially within the already under pressure to consider new business models, products, baby boomer generation. Customer preferences, particularly those customer segments and channels to maintain their unique value of younger segments of the population, are shifting toward a desire proposition and be sustainable in the future. Whether this segment for increased knowledge and control of a household's Financial of the industry is able to adapt will have a significant impact on the situation and investment status.

8 Approximately 80,000 Financial Advisors working in the segment Additionally, new regulatory requirements regarding Financial today, on the 12 million Canadian households considered part of Advisors ' relationships with their clients are being contemplated in their mass market customer base and on the Canadian economy as Canada and the US. In the wake of the Financial crisis and a num- a whole. ber of well-publicized cases of investment fraud, such regulations Study Objectives To assist in developing a robust understanding of the Financial This study seeks to inform the public, key policy makers and Advice industry in Canada, The Financial Advisors Association of regulators on the impact of SMB Financial Advisors across Canada.

9 Canada ( Advocis ) engaged PricewaterhouseCoopers LLP (PwC) to These Advisors run their own businesses advising millions of individ- conduct a comprehensive and objective analysis of the industry, the uals, families and companies ( typically entrepreneurs and small issues and challenges faced by the SMB Financial Advice segment, businesses) on a wide range of Financial matters to assist them in and an analysis of the industry's economic impact. PwC conducted meeting their long term Financial goals. the economic impact study in conjunction with HDR Corporation. Sound Advice . Approach In order to complete the study, a variety of primary and secondary n An SMB Financial Advisor Survey of approximately research approaches were used, including: 1,800 SMB Financial Advisors across Canada in order to n.

10 Industry research on the composition and key characteristics obtain specific data regarding demographics, revenues, of the SMB Financial Advice segment, in addition to consumer expenses and employees. characteristics and emerging industry trends. n An estimate of the economic impacts of the industry based n . A review of regulatory frameworks in Canada and in other on the results of the SMB Financial Advisor Survey, and jurisdictions ( the UK, US and Australia), in order to information from Investor Economics and Statistics Canada. understand recent and proposed regulatory changes and their estimated impacts. Summary of Key Findings Following the research phase of the study, PwC identified a number of key findings related to the SMB Financial Advice industry.