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Can you believe this? There's actually a debate going on about whether financial advisers should be explicitly required to put the interest of clients first.

Gee, tough one.

Should we have a financial advice industry that's based on selling products and where the guiding principle for clients is caveat emptor?

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Or should we make financial advisers a true profession with a fiduciary standard?

Fiduciary is a legal term that comes from the Latin word fiducia, which means trust. Encyclopedia Britannica defines a fiduciary as "a person who occupies a position of such power and confidence with regard to the property of another that the law requires him to act solely in the interest of the person whom he represents."

In my years writing this column, I have met hundreds of diligent advisers who already meet a fiduciary standard. They build personalized financial plans for their clients and they choose the best investment products to realize these goals, regardless of how much they pay the seller in fees and commissions.

The problem with the advice business is that this not a universal standard. Too many advisers are mutual fund salespeople who work similarly to sellers of cars and furniture. You know the story - you walk in to make a purchase and you end up in negotiations with someone whose goal it is to make money off you. It's understood and it's fine because everyone knows the rules.

Things are different in the financial world. Here, we have "advisers" who may advise, or they may actually do nothing but sell stuff. A fiduciary standard would clarify things. People who want to call themselves advisers would be fiduciaries and those that don't would be mutual fund salespeople.

Investor Education on mutual funds:

  • What will it cost to invest in mutual funds?
  • Feeling ripped off, investors? You're not alone
  • Should I buy my mutual funds from the same fund company?
  • How do I sell mutual funds?
  • How do I put more money in my mutual funds?

Clients who wanted overall financial planning would see an adviser. Those who wanted to buy some investments would sit down with a salesperson and do all the requisite haggling about commissions (picture it: your salesperson going to "ask his manager" if he can sell you a mutual fund with no upfront commission).

The idea of dividing the financial world into advisers and salespeople comes from Cary List, president and CEO of the Financial Planning Standards Council, which administers the Certified Financial Planner (CFP) designation in Canada.

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Mr. List participated in a conference last week on fiduciary duty for advisers that was staged by the Canadian Foundation for Advancement of Investor Rights (FAIR) and York University's Hennick Centre for Business Law. His take on the views presented was that there's no agreement about what fiduciary duty truly means in a legal sense. As a result, he thinks the right approach is to require a fiduciary duty of advisers in all but name.

Call it a duty of care, for example. Then describe the people who agree to assume that duty as advisers, and the rest as salespeople.

"The average Joe can understand the difference between a salesperson and an adviser," Mr. List said.

There are a number of arguments against requiring advisers to be fiduciaries, or something equivalent. Some say current standards are adequate to protect investors, while others say a better approach is to educate people to make them smarter consumers of financial products and advice.

But you can't help but feel that opposition to fiduciary-like rules is about keeping the status quo in the financial industry. Better to keep allowing all those mutual fund salespeople to pretend they're advisers so people will trust them more and buy lots of products. Better not to introduce ethical standards that will expose ethical deficiencies and give wronged investors more juice to pursue restitution.

Investors need all the juice they can get because the current system is not doing the job of protecting them. Don't be distracted by outliers like Robert Mander or Earl Jones, phony advisers who betrayed their clients.

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The much bigger problem is low-key but more frequent abuses like overrisky portfolios and the hawking of junk products that pay fat fees.

In the aftermath of the global financial crisis, there are signs the investment industry is striving to bring more of an advice component to its relationship with clients. If it's all about selling investing products, then a year like 2008 can be deadly for business.

But with advice comes responsibility. Either the investment industry accepts it and adopts the fiduciary-like standards that define a serious profession, or it keeps a status quo where selling is the main objective.

Let's close on an optimistic note. Mr. List is in favour of applying fiduciary-like standards to the industry, and he represents the largest advisory designation in the country with 17,500 advisers. As he puts it, why not adopt higher ethical standards? "What is the danger - that people will understand what the duty of care is? How is that a bad thing?"

Follow me on Facebook. I'm at Rob Carrick - Personal Finance


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What rules should cover

Here are five aspects of a financial adviser's fiduciary duty that are being proposed in the United States: Put the client's best interest first.

Act with prudence - that is, with the skill, care, diligence and good judgment of a professional.

Do not mislead clients - provide conspicuous, full and fair disclosure of all important facts.

Avoid conflicts of interest.

Fully disclose and fairly manage, in the client's favour, unavoidable conflicts.

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Source: FAIR

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