Last October, the Canadian Securities Administrators released a consultation paper with potentially serious implications to our community. The paper, “The Standard of Conduct for Advisers and Dealers,” is almost 40 pages long.
This weighty tome reviews the state of the Canadian marketplace and contrasts it to recent changes undertaken in the U.S., U.K., Australia and the EU as a pretext for justifying changes that are looking to make in Canada. CSA identifies five major concerns:
- There may be an inadequate principled foundation of the standard of conduct owed to Canadians.
- That standard of conduct may not fully account for information and financial literacy asymmetry between advisors and dealers and their retail clients.
- There is an expectation gap because investors incorrectly assume their advisor must always give advice in their best interests.
- Advisors recommend suitable investmentsDynamic (Investments) but not necessarily in the client’s best interests.
- Application of the current conflicts of interest rule might be less effective than intended.
Translation: There is no blanket regulation imposing a fiduciary responsibility on advisors. Essentially, the advisor community is missing a legally mandated financial version of the Hippocratic oath.
Do no harm…
Should there be one? In my belief, absolutely. There is a large degree of informational asymmetry between clients and advisors, and clients do believe advisors are mandated to act in their best interests.
Given their role as paid advisors to clients, there should be a mandated fiduciary responsibility imposed on our community.
In the financial advisory industry, just like any other, there are people who are good at their jobs, people who are misguided, people who are bad at their jobs, and people who are outright crooks. Advisors are human. So the impact of what CSA is proposing will be different, depending on which category an advisor falls into.
Read: Defining fiduciary duty
Conflicts of interest
Many advisors work hard to eliminate even perceived conflicts of interest, while others have been known to auction off a client’s business to whichever supplier offers the best sports tickets or other perks.
When I overhear advisors talking about these practices I think, “If only your client could hear you now.”
The reality is a mandated ban or disclosure of situations that would create a conflict of interest would not hurt anyone acting in the best interests of the client.
But there are many advisors who will lose clients (or at least their perks) if they fail to adapt.
This is surely the touchiest of subjects. CSA’s paper makes direct reference to two possible changes to compensation: better disclosure, and potential outright banning of some sales commissions.
Let’s face it: this needs to happen. My mechanic doesn’t start working on my car until he gives me a quote breaking down parts and labour costs. And if I don’t like it, I can shop around. Don’t clients have the same right? And yet non-disclosure is rampant in our industry. A few examples:
● Insurance: How many clients are told that the total comp paid to the advisor and MGA equals, or exceeds, the first-year premium?
● Mutual Funds: How many clients know what they’re actually paying in MERs? And worse, how many have been told what the advisor is paid in DSC commission?
● Brokerage: New-issues compensation, embedded undisclosed markups on bonds, and the need to hit monthly targets create an incentive to sell at any cost.
● Bank Branch Advisors: They claim they’re on salary. But if their bonuses are linked to asset gathering, isn’t that a commission?
If you’re not making those kinds of disclosures, what’s stopping you? Most likely it’s linked to an underlying fear of a client questioning your intentions and, in turn, potentially losing that compensation. But that’s the definition of a conflict of interest.
The ugly truth
For some advisors, reform will have little to no impact on their businesses. For others, the picture is far less pretty: better disclosure, compensation reform and the elimination of conflicts of interest – along with a mandated fiduciary responsibility – is what’s needed in the Canadian marketplace.
This may lead many advisors, who are unable to overhaul their practices, to exit the industry. But if people are going to turn to us for expertise, we have a duty to act in their best interests.
At its core the key value proposition for every advisor is to make things better for their clients. It’s long past time to create a structure within this industry designed to enable that goal.
What do you think? Email us or comment below.
Justin August is a pseudonym for a Vancouver-based financial advisor.
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