One of the phoniest words in finance is adviser.
Adviser. If only. In truth, the term has been devalued to near nothing by people who flog investment products while passing themselves off as providers of advice. What a drag for the advisers who really do provide advice, and all the investors who would really benefit from using them.
Can we fix this disconnect somehow? It’s worth a try. So go to my Facebook personal finance page (facebook.com/robcarrickfinance) and lend your support to the idea of securities regulators requiring investment advisers to work in their clients’ best interests or, in legal terms, as fiduciaries. Just click the “Like” button under the link to this story online or write something like “I support a fiduciary standard” or “clients come first.” Even a “thumbs up” or “right on” will do fine.
Canada’s provincial securities regulators recently floated the question of whether there should be a statutory requirement that advisers have a fiduciary duty to clients. Regulators are using the term “statutory best interest duty,” which is like fiduciary duty in that it means everything an adviser does must meet the test of whether it’s good for the client.
We’re still in a preliminary phase on this initiative. In issuing a consultation paper last month, a group of provincial regulators called the Canadian Securities Administrators began with this reality check: “No decision has been made whether a statutory best interest standard should be adopted (and on what terms), whether another policy solution would be more effective or whether the current Canadian standard of conduct framework is adequate.”
Comments on the fiduciary standard from investment firms, front-line staff and individual investors are welcome until Feb. 22. After that, the CSA will consider the input received and decide how to proceed.
This is where you come into the picture. Individual investors need to get involved to remind regulators they’re working for actual people and not for abstract principles of fairness. Bay Street needs to know that the fiduciary question isn’t going to be settled in the usual closed industry/regulator loop, with little or no input from the investment industry’s customers.
U.S. authorities are working toward adding a fiduciary standard to the parts of the financial industry where it’s not already in effect. Australia is introducing a version of this standard, and Britain has taken steps of its own to clarify the role of advisers in working with clients. Here in Canada, introducing a best interests standard will make settling the NHL lockout look easy. It might be on par with turning the Toronto Maple Leafs into a Stanley Cup contender.
By no means are all investment industry people in Canada opposed to the idea of a best interest or fiduciary standard. Increasingly, there’s a slow-growing recognition that moving in this direction will clarify the role of advisers and make people more confident about using them.
However, the core of the investment industry thinks a fiduciary standard will cramp its style, which is to sell products, and financial advice if absolutely necessary, to generate fee and commission revenue. The industry prefers the current standard, which is that investments be suitable to the client’s needs. But suitable is a word like edible in that it’s totally subjective. We need more clarity.
Tough market conditions may even be hardening the financial industry’s attitude toward its responsibilities to clients. Recent events at the Ombudsman for Banking Services and Investments, a last stop for investors with disputes against the financial industry, certainly suggest this. In the minority of cases where the OBSI recommended compensation to investors, there used to be some certainty that the firm involved would bow to the ombudsman’s judgment. Now, firms are starting to balk.
In two recent cases involving investors with significant losses, OBSI’s recommendation for restitution were rebuffed. OBSI has publicly named the firms involved (Octagon Capital Corp. and W.H. Stuart & Associates), but there’s no more it can do.
A best interest standard won’t stop abuse of investors, but it will give new authenticity to the term adviser. Advisers would actually have to talk to clients about their needs and goals, then recommend appropriate investments. Tricks of the phony adviser, like convincing people to borrow money to buy more investments than they could otherwise afford, will be much harder to pull off.
The same applies to selling expensive in-house mutual funds instead of better products from other firms. And it also applies to selling deferred-sales-charge mutual funds, where you actually have to pay a fee to get your own money back in the first six or so years after you buy.
It’s going to be a slog to get a fiduciary standard applied in Canada, but the process is at least under way. Every investor who supports the process helps prevent it from being sidelined.
Stand up for the fiduciary standard. Here’s how:
1. Go to my Facebook personal finance page and indicate your support:
2. Contact your provincial securities commission:
3. Send me an e-mail and I’ll relay it to the right people.