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Should a Fiduciary Standard be Mandated?

By Cora Pettipas, CFP

When I taught financial planning classes at Mount Royal University, I used to tell my students that a client’s financial planner is more important than their doctor – unless they are currently bleeding to death. Yes, this may sound a bit factious, but I firmly believe in the central positive role an advisor can have in a person’s life. Financial planners have a vast skillset to help clients cope with managing their precious resources and helping people plan proactively for what life events bring them. Most advisors can think of a time when their client has called them first after a life change like a divorce or job promotion.

The client and advisor relationship can go very well based on disclosure and mutual trust. However, because of the level of disclosure involved, there is more of an opportunity for professionals to take advantage of clients. It would be ideal if all financial professionals did the right things for the client for the right reasons. However, there can be a minority in any group that do the wrong things with clients (whether for personal gain, laziness, or lack of competency). This has never been more publicized than since the global financial crisis. The solution heralded is regulatory changes, where advisors are legally mandated to do the right things, even if it is for the wrong reasons (just to stay registered, as opposed to helping the client).

Financial Services Regulation in Canada

The financial services industry in Canada is undergoing regulatory change, albeit not as drastic as other countries such as the US or Australia. In terms of policy reform, Canadian regulators tend to show a ‘wait and see’ attitude and look towards our southern neighbor for guidance and initial results. Also, unique in the global standard, Canada’s regulation is a patchwork of provincial and national regulation, depending on one’s sector. Banking is national, and insurance, credit unions, and securities regulation are provincial. Depending on what a Financial Planner has as core business activities, they can be under multiple regulatory jurisdictions. In addition, one province, Quebec, is under civil law and all others a common law regime. Adding to this complexity, provincial regulators vary vastly in resources, capacity and competency to handle their mandates. There has been past efforts to harmonize and nationalize regulation, but it has been unsuccessful so far, and is not being contemplated in the foreseeable future.

The main regulatory change that is being contemplated is a legal obligation of advisor fiduciary duty (except in Quebec, as they already have one). The Canadian Securities Administrators put out a comment paper to stakeholders with a deadline of February 22, 2013. The consultation paper (33-403) is 37 pages and poses 52 discussion questions. It is a very interesting paper with a nonpartisan tone, looking at the pros and cons of this adoption as well as what other jurisdictions outside Canada are doing. The CSA discussion paper can be viewed here.

Many were surprised when the news of the proposed best interest legislation came out. For one thing, it already exists, or is about to exist in the US, UK, Australia and the EU. Secondly, a lot of financial planners and advisors think they already have a fiduciary duty to their clients, as do their clients. The Canadian Securities Course through the CSI (the course needed to take to be registered with IIROC or the MFDA to sell investments), states, “…Fiduciary obligations also arise when an advisor is providing investment advice…the advisor owes a duty to the client to advise fully, honestly, and in good faith.” (vol. 1, ch. 3, p. 15). Second, on the financial planners Standards Counsel’s rule 202 of the CFP certification code of conduct states, “A CFP professional shall act in the best interests of the client.” Rule 101, part a, goes further by stating, “A CFP professional who takes custody of all or any part of a client’s assets for investment purposes, shall do so with the care required of a fiduciary.” Also, a recent study completed by the Canadian Investor Education Fund (IEF) found that 70% of investors believe that advisors have a legal fiduciary duty to put the client’s needs ahead of their own. They did not poll advisors.

A Step in the Right Direction

In general, I think the proposed changes are a very positive step for Canada. It would put advisors up to the level that is already demanded of CFP professionals. However, fiduciary should not be confused with a patriarchal relationship with the client. Nothing gets a client more frustrated than being told what they can or cannot do with their money. Ideally, an advisor fiduciary gives client advice and recommendations with an educational focus, based on suitability. Afterwards, a client should be able to refuse some or all the advice given by an advisor, if they so choose, and are willing to sign off on the risks. In the past, I have had to refer clients to the discount brokerage path because they wanted to put more than ten percent of their portfolio in uranium/potash/Ontario Diamonds/Gold/farm land/Asia/energy, something our compliance would not accommodate. Unsolicited trades and directions should be acceptable if the client demands it, or the client will be even worse off by having a pure transactional account, and no guidance, with a discount brokerage. A client taking some of an advisor’s objective advice is better than them taking none.

Canadian stakeholders can participate in the CSA’s request for comment (it is easy nowadays – you just email your word document response off to John Stevenson, jstevenson@osc.gov.on.ca).  From my experience with Canadian policy makers, they do read your input and do take it into account. It is dangerous when policy is developed and driven from the thirty thousand foot view approach, and advisors should be actively involved, either individually, or through their representative associations. I have often contemplated about seeing the person(s) who developed the RESP and CST rules try to actually explain them to clients. If they had tried, maybe the rules would be more simple, more intuitive and easier to retain for clients. Industry participants need to be involved in policy creation, so it is applicable and workable, and does not smother them in compliance rigor and superfluous costs.

There has been a concern about a salesperson being called an advisor, but really, most professionals (even lawyers) are salespeople in some capacity, whether we collect in commission, salary, billable hours, or some combination. The problem is when an advisor’s gain is a client’s loss. An advisor’s work should leave a client financially better off. All the best financial planners I know are doing the right things for their client and putting the client first, as it is the best way to insure client loyalty, future business and referral business. Canada should absolutely formalize this, as it is already really best practices and would raise the bar for advisor competency and help Canada live up to the evolving global standard.

Do you have more to add? Please email Mr. Stevenson your thoughts.

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