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In court cases in which judges can find that an advisor provided ‘unsuitable’ advice or failed to act as a fiduciary, they will often opt for the former as it is easier to prove and more likely to stand up to appeal.

designer491/iStockPhoto / Getty Images

Ask the average Canadian investor if current regulations require financial advisors to act in the best interests of their clients. Their responses would likely be split between “yes” and “I sure hope so.” But the real answer to this question is, “No, but with few exceptions.”

In fact, most advisors in Canada aren’t obligated to put their clients’ interests first. That is, they’re not being held to a fiduciary standard and they aren’t required to act as fiduciaries in their dealings with clients.

So, what exactly is a fiduciary? According to the definition on Investopedia, a fiduciary is “a person or organization that acts on behalf of another person or persons, putting their clients’ interest ahead of their own, with a duty to preserve good faith and trust. Being a fiduciary thus requires being bound both legally and ethically to act in the other’s best interests.”

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While the precise application of the fiduciary duty in a financial advice context is up for debate, the U.S. Certified Financial Planning Board of Standards Inc. (CFP Board) defines the fiduciary standard for certified financial planners (CFP) in the U.S. as follows:

  1. A duty of loyalty that requires the financial planner to put the client’s needs ahead of their own; to avoid, disclose, and obtain approval from the client regarding material conflicts of interest; and to act without consideration for the financial planner’s own interest.
  2. A duty of care to act with prudence, care, and diligence.
  3. A duty to follow client instructions.

For more than half a decade, advisors in the U.S. have been waging a battle over proposed legislation that would impose a universal statutory fiduciary duty upon all advisors.

The roots of this dispute go back all the way to the U.S. Investment Advisers Act of 1940, which established the U.S. registered investment advisor, or RIA, licencing category.

Getting licensed as an RIA has become the category of choice for independent advisors in the U.S. looking to do what’s best for their clients. One of its big selling points is that it has a statutory fiduciary duty to clients, which RIAs have marketed as a meaningful differentiator. And it’s worked. RIAs in the U.S. serve more clients than the entire population of Canada, all while managing more than US$50-trillion in client assets.

However, participants in the U.S. financial advice business have failed to reach a consensus about the need for a universal fiduciary rule applied to all advisors. It is a fight that has led to: the Trump Administration stymie the proposed rule; groups of advisors sue the U.S. Securities and Exchange Commission to block a watered-down standard known as Regulation Best Interest, which survived and has come into effect; the CFP Board imposing its own fiduciary rule on all U.S. CFP certificants; and, most recently, President Joe Biden promising to revisit imposing a universal fiduciary standard on U.S. financial advisors during his campaign.

Here, in Canada, we don’t have the lengthy history of statutory fiduciary duty that the U.S. does, but could it mean that a fiduciary duty is more likely to be imposed by the courts?

While a fiduciary duty is not written into law, it doesn’t necessarily have to be. There are relationships that exist in which the definition fits. So, in theory, the right court case could set a precedent for the industry.

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But in court cases in which judges can find that an advisor provided “unsuitable” advice or failed to act as a fiduciary, they will often opt for the former as it is easier to prove and more likely to stand up to appeal, according to Harold Geller, an associate at MBC Law Corp. in Ottawa. (He specializes in representing investors who feel they’ve received the short end of the stick in their relationships with advisors.)

That leaves only a few circumstances in which Canadian advisors are held to a fiduciary standard:

  • Advisors registered as portfolio managers – and even then, the fiduciary duty in this context only applies to the management of a client’s investments, not to any other recommendations the advisor has provided.
  • Advisors who hold the chartered financial analyst designation or the handful of Canadian advisors who hold the U.S. CFP designation.
  • Members of the Financial Planning Association of Canada*, a voluntary membership organization of financial planners who hold the CFP, qualified associate financial planner or registered financial planner designations.

Although financial planning organizations like FP Canada, the Institut québécois de planification financière and the Institute of Advanced Financial Planners have codes of ethics that read very much like the CFP Board’s description of an advisor’s fiduciary duty, these groups cannot impose legal sanctions on their members. Rather, they can only revoke charters or designations and revoke membership in their organizations. So, while there are negative consequences for advisors resulting from these sanctions, they don’t rise to the level of legal liability.

As a result, in a country in which roughly 100,000 people hold themselves out as financial planners, advisors, or some equivalent title, only a small minority abide by a designation, licence, or membership in an organization that imposes a fiduciary duty on them. Even then, the implications for failing to meet the fiduciary standard may be simply banishment from an organization.

Canadians should be disappointed by this lack of protection. Those of us in the industry who act like true professionals should be disgusted by the current state of affairs as it only serves to damage our collective credibility – all while endangering the future of our industry.

Jason Pereira is a partner and senior financial consultant at Woodgate Financial Inc., a financial planning firm under the IPC Securities Corp. umbrella in Toronto. *He is also president of the Financial Planning Association of Canada.

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