Why A Fiduciary Standard For Investment Advisors Is Needed In Canada

The United States, Britain and Australia have recently introduced legislation to strengthen the legal rights of investors and put in place a professional standard for investment advisors.

Unfortunately, Canadian standards are far inferior.  They rely on self-regulatory organizations such as the Mutual Fund Dealers Association, the Investment Industry Regulatory Organization of Canada and the Canadian Securities Administration to police their own.

Related: Fee Only Financial Planner Vs. Commission Based Advisor

They believe they are doing the job and don’t need more regulation.

However, anyone in any province, except Quebec, can call themselves a financial planner without meeting any minimum qualifications or standards.

What Is A Fiduciary Standard?

A fiduciary standard makes it a legal requirement that an advisor must put a client’s interests first.  It means avoiding conflicts of interest and making the best recommendations for the client even if it means lower fees for the advisor.

It establishes the duties of the advisor and the standards to which the advisor will be held, especially when the advisor has discretion over key decision making for the portfolio.

Related: When To Fire Your Investment Manager

This is already the norm for other professionals such as lawyers and doctors.

Reliance on Advisor’s Advice

It’s not reasonable to expect retail investors to understand the details of highly complex financial products and services and the risks involved, especially when vulnerabilities exist such as age, language skills and knowledge or experience in the stock market

Clients have trust and confidence in their advisor and rely on their advice for making investment decisions.  They look to their advisors for advice on asset mix and specific types of investments to buy and trust their opinions

The industry promotes the idea that they can and should be trusted.

Related: Do You Need Financial Advice?

Know Your Client

The advisor has the obligation to learn about the client, their personal financial situation and investment experience, investment objectives and risk tolerance.

This information is most often obtained via a “Know Your Client” (KYC) document.

All information that could be material to the investment decision should be disclosed.  The investment should not be merely “suitable” – it should be in the “best interest” of the client.

Mr. Advisor recommends a high-priced mutual fund with a deferred sales charge designed to generate the highest commission for himself.  The fund is suitable, but it isn’t necessarily the best solution.  If the “best interest” standard is observed, he would possibly recommend a better, cheaper fund, Index fund or ETF. 

The investor is making a purchase decision with inadequate knowledge and guidance and may not get the results he needs.

Advisors who depend on commissions may have conflicts of interest and not always disclose the relevant details to trusting clients

Related: Mutual Fund Fees – The High Cost Of Canadian Funds

Retail investors, especially seniors, are very trusting.  They don’t understand the legal implications of the KYC forms, which may not have been completed correctly.  Unsuitable investments are the number one cause of complaints.

Illusion of Competency

Clients believe their financial advisor is a qualified professional when the fact may be that they have very limited training – especially in the mutual fund sector.

Advisor titles on business cards can be misleading and create the illusion of competency and professionalism without regard to their true capabilities, constraints and registration.  Many investors are not aware of what products their advisors are licensed or registered to sell.

Related: 5 Common Mistakes Investors Make

Many Canadians are misinformed about the required qualifications and ethical obligations of their financial advisors.  In a survey done by the Financial Planning Standard Council, 70% of respondents falsely believed that individuals must be licensed in order to call themselves a financial planner.

Private Savings

Workplace defined benefit pensions are no longer the norm in the private sector.  With the introduction of RRSPs, TFSAs, RESPs and employer pooled registered pension plans Canadians are being encouraged to manage their own private savings rather than relying solely on the already burdened government social and pension programs.

Related: Is Our Old Age Security Program Sustainable?

This is not a bad thing, but it pushes them to depend on the financial services industry.

Older Canadians can’t afford bad advice.  The financial harm suffered when a bank or investment firm makes a mistake is magnified when they have fewer years to make up the losses and fewer income opportunities.

There urgently needs to be a push for a fiduciary standard to protect investors.

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  1. john on August 29, 2012 at 4:53 am

    Unfortunately the financial services industry has created this illusion that the public cannot do without them and that they have impeccable standards and credentials. They create a world of complications so that the public thinks that they need them. A fiduciary standard will not make any difference. As a realtor I can tell you we have had a fiduciary standard for a long time and it does mean a damned thing to a majority of agents. Most do not give a damn about their clients. A financial advisor or stockbroker or whatever other fancy title they invent for themselves is first and formost a salesperson. They do not get paid unless they sell something and a lot of them do not care if that something is junk or not. Don’t get me wrong I have nothing against salespeople but in the financial servises industry it is quite amazing how much information they do not tell you until it is too late.
    Most investing people just need to start taking responsibility for themselves and not relying completely on a finacial advisor.
    It is very easy when things go bad to blame someone else……when you take responsibility for yourself the buck stops with you, period.
    I have been looking after my own investments for around 3 years now and just wish I had done it sooner.

    • Boomer on August 29, 2012 at 2:29 pm

      @john: I agree with you that people should take more responsibility for their own money instead of offloading it. They should not only fully understand their investments – it’s also their responsibility to check the qualifications of their advisor. People are too trusting. Money matters are a taboo subject for conversation yet we hand over our life savings to basically a complete stranger.

      I understand that a fiduciary standard will not eliminate questionable practices. They don’t have all those stories about sleezy lawyers for nothing 🙂 but I think there should be a standard for education, ethics, conduct etc. to at least reduce the number of people that hang up a “financial advisor” shingle when they have no qualifications whatever.

  2. W at Off-Road Finance on August 29, 2012 at 6:05 am

    I think a fiduciary responsibility makes sense for advisers/planners. By itself it won’t DO anything, but it will make clear what the expectation is. That’s good because it helps alter the behavior of the fairly large honest portion of the population.

    The you can worry separately about what to do with the dishonest people.

  3. Eric Putnam on August 29, 2012 at 8:33 am

    Interesting perspective and I agree that there has to be more of a fiduciary responsibility for Canadian financial advisors. I believe we all need to take the time to be well informed of our options when it comes to our finances. While advisors can provide us with their opinions at the end of the day its our money and we have to make the choices. Even bankers who are salaried staff are in reality responsible to maximize their employers’ profits.

  4. Joe on August 29, 2012 at 9:14 am

    Amen. Self-regulation is NOT regulation. You’d think people would have heard of “foxes guarding the hen house.” Yeesh.

    And the banks are the WORST for the illusion of competence — they run such patronizing advertisements about needing their advice to get rich. Then you go in, and they want to stick you in one of their own high-margin, high-fee mutual funds. Just disgusting.

  5. Roger Wohlner on August 29, 2012 at 12:33 pm

    Great post and interesting to hear the Canadian perspective. Here in the U.S. there is an ongoing debate about whether all who dispense financial advice need to adhere to a Fiduciary Standard and also as to which regulatory body will regulate investment advisors. I am a fee-only advisor and a member of an organization called NAPFA, the largest professional organization of fee-only advisors in the U.S. We sign/reaffirm a fiduciary oath with each annual renewal. As one of the comments mentioned, an advisor who is a fiduciary is no guarantee of competence or even honesty, but it does set a standard and an expectation for the client-advisor relationship.

    • Boomer on August 29, 2012 at 2:35 pm

      @Roger Wohlner: It’s great to hear from our U.S. counterparts.

      Unfortunately Canada is woefully behind in regulating financial advisors. We have too many regulatory bodies that just end up competing with each other and putting off important decisions. This is certainly an area of “Buyer Beware.”

  6. LifeInsuranceCanada.com on August 30, 2012 at 7:31 pm

    I think perhaps there’s little appreciation of how much regulation there already is in the financial services sector. Just because anyone can call themselves a ‘financial planner’ doesn’t mean people who are licensed to sell various products are not already highly regulated – they are.

    The KYC document you mentioned is one example – mutual fund salespeople are *already* required to ensure that they ‘know their client’. There’s reams of paperwork around it already. The documentation requirements for mutual funds reps is already onerous to the point of insanity. Everyone has to be able to prove at any moment that they have done everything they can to ensure the client has absolutely the best product for their clients and show how they arrived at that transaction. And the documentation, record keeping and responsibility is already passed up and down the food chain – if a rep screws up, they’re already responsible, so are all the dealers they work with, right up through to the companies. I don’t work in that side of the financial business but what I do see of it is that it’s regulated beyond belief already.

    And you know what? Outside of a few high profile cases, I think most people are happy with their ‘financial planner’. They may be happy with them for all the wrong reasons, but at some point it’s caveat emptor. More regulation won’t help anything at this point.

    My banker is a good example. I like index funds, and believe them to be very conservative investments (if you believe index funds are stable performers over the long term, you’ll see how I arrive at that conclusion). So I go to the bank to open an investment account for index funds and I get the ‘KYC’ questionnaire from the banker, who in all serious doesn’t even know what an index fund is. He was required to step me through the questions before he could give me an index fund. But get this – because index funds are perceived as risky, I had to cook up my answers to make me look like an aggressive, active investor before he was ‘allowed’ to offer me an index fund. How ridiculous is that? yet that’s what more regulation will get you. Everything dumbed down to the lowest common denominator.

    More edumication, that’s another story entirely. There are already plenty of continuing education requirements for reps – but there’s little to no requirement for the education to be worthwhile or actually educational. Frankly I’m embarrassed by the state of continuing education in the industry. Out of the dozens and dozens of courses I’ve attended, I can count on the fingers of one hand the ones where I learned anything.

    • Boomer on August 31, 2012 at 10:17 am

      @LifeInsuranceCanada.com: I dont agree with some of your points.
      1. Insurance and mutual fund salespeople are highly regulated – I know as I used to be one – but the financial industry as a whole is not, and subject to abuse.
      2. You claim that most people are happy with their financial advisor. If you don’t know that there are other-perhaps better-products available to you of course you’ll be satisfied with what you have. It’s easy to give the spiel about how the market fluctuates, be patient, hold on to your investments, buy more, everything will be fine – while life savings are eroded with no time to rebuild them.
      3.Your comment about the KYC questionnaire shows exactly how useless this document is. People just don’t answer correctly – whether they are outright lying (like you claim) or are naive about how much risk they can tolerate. Dumbing down information is not what’s required but advisers that can actually explain everything about their products and services so that it’s complete and understandable enough for their clients to make appropriate decisions.

      • LifeInsuranceCanada.com on August 31, 2012 at 1:00 pm

        They highly regulate everyone and every point in the industry. If you think some area of the financial services sector doesn’t qualify as ‘highly regulated’, I’ve no idea which one it would be.

        If a broker makes a trade, they have to document it to the point of insanity. Then every single contact along the chain has to do the very same thing – the broker sends it to their company, the company sends it to a dealer etc. And AFAIK, every single one of them has to hand review every single trade and deal. You can’t regulate much more.
        2. I pointed out caveat emptor. At some point, if you can’t be bothered to do minimal research, you’re going to get screwed. that’s not the financial sector, that’s life. I doubt I get the best deal when I buy cars. Or houses. More regulation doesn’t necessarily protect people from their own lack of accountability for their finances.
        Your point about buy and hold, don’t know how to respond. Buy and hold has been shown to be the most stable way to have high earnings on equities. It’s exactly what someone should be advising consumers to do. Advising clients to start market timing, wow, that’s an example of what the industry is doing wrong, not what they’re doing right.
        3) My point about KYC producing stupid results is an example of why more regulation will just do more of the same – more stupid results. And we’re beyond the tipping point where trying to implement common sense into consumers or reps is hurting the industry, not helping consumers.

        The industry could use less regulation if anything. It’s becoming burdensome and no longer protects the consumer. What’s needed is education. And not ‘more’, because there’s lots around. What’s needed is ‘better’ education.

      • Larry Elford on September 13, 2012 at 3:42 pm

        if you mean by “highly regulated” they have a lot of paperwork, and many regulatory hoops to jump through, before they can do their jobs, then I agree with you. If, on the other hand you are taking about rules and enforcement that protects the public from predators, I do not see any actual application of those rules. Self regulation is simple decriminalization for systemic criminals.


  7. TM @ Young and Thrifty on August 31, 2012 at 8:38 am

    Fantastic article, I completely agree Boomer. The rise of the mutual fund salesman/saleswoman class who can claim all kinds of credentials has crippled many retirements across this country (especially when combined with our award-winning MER rates).

  8. Larry Elford on September 13, 2012 at 3:40 pm

    A former stockbroker of 20 years points out a dozen tricks of the trade, used to separate trusting customers from their rightful investment returns. Un-prosecutable fraud seems to be a common theme.


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