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.

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.

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

Reliance on Advisors 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.

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

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.

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.

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.