Some debates can only occur behind closed doors. It’s hard to imagine discussing the merits and faults of a system that would ensure client interests are put first, in front of clients.

But some valid points were made against the adoption of a fiduciary duty in a panel discussion on the role of advisors at the Canada Cup of Investment Management in Toronto.

Such a system might ensure the best interests of clients are served at the high end of the market, according to its critics, but lower-asset investors might find themselves virtually shut out of the market.

Most investors are better off dealing with a fiduciary, said Warren MacKenzie, president and CEO of Weigh House Investor Services, financial advisors have the experience needed to make tough investment decisions.

The fiduciary standard has already been adopted in the UK and Australia, he pointed out, and most Canadian clients already believe their advisor is required to put client interests first.

He admitted that a requirement to offer the lowest cost option might threaten some advisors’ businesses, but this would accelerate the adoption of fee-based professionalism.

But the Canadian advisory industry already has most of the elements of the fiduciary duty in place, said Joanne De Laurentiis, president and CEO of IFIC, listing the obligation to deal fairly and in good faith, conflict disclosure and account supervision.

Compensation disclosure is already in place, she says, and that’s more than can be said for the UK and Australia, where the fiduciary duty has been adopted. And the introduction of the mutual fund fact sheet in July will lay fees out even more clearly.

She pointed out that Common Law already lays out where there should or shouldn’t be a fiduciary duty, regardless of what your designations are. The argument that Canada needs the fiduciary standard undermines confidence in current industry standards, she said, pointing out that the Canadian market is hardly subject to utter chaos at the moment.

Imposing a fiduciary duty on all advisors could have a negative impact on lower-asset clients, said Annamaria Testani, senior vice-president, business development and national sales, Wellington West Capital. The lower the client’s sophistication, the higher the duty of care, so lower asset clients would cost advisors more to serve, while increasing the exposure to liability.
Testani suggested that imposing the fiduciary standard could give clients a false sense of security. They already spend more time researching car purchases than selecting an asset manager, so a rubber stamp of “Fiduciary Standard” could lower client due diligence even further. And the fiduciary standard does nothing to enhance the advisor’s skill set.

The fiduciary standard could also cost the advisor business, because the investment policy statement could preclude them from placing some trades that the client insists upon. Under the current system, she said, the KYC can be revisited and perhaps revised to permit such an investment.

That, said MacKenzie, is part of the problem with the current system. The KYC document does nothing to protect the client, as it serves only to protect the firm. The fiduciary standard would require a “proper” investment policy statement, which lays out the full range of products that are suitable for the client. And a proper IPS, he says, remains a rarity under the current system.

At the higher end of the market, this is already a growing business practice, said De Laurentiis, but for a $100/month PAC client, an IPS is entirely impractical. For these clients, it is more important that they get started saving, with the investment choices becoming nearly irrelevant.

Testani agreed, pointing out if the investment process is made too complicated, advisors will refuse to accept investors who are just starting out. These clients would be relegated to being served by “cashiers” she said, and it would be hard to frame this service level as being in the client’s best interest.

Regulators must share the blame for the complexity of prospectuses, De Lauretiis said, extolling the virtues of the simpler Fund Facts sheet. In fact, the investment fund industry is lobbying that a similar document be introduced for a range of other products.

As for compensation structure, the argument that all clients would be better served if trailers were banned is flawed, said De Laurentiis. Embedded compensation serves the lower end investor very well, as they wouldn’t be able to afford to invest otherwise. The UK experiment is probably going to result in a loss of advisor access to a lot of people.

MacKenzie agreed that fee-based accounts are not always in the best interest of clients. He cited the case of a retiree acquaintance living in Halifax with $300,000 in assets. Her income focused portfolio is essentially buy-and-hold, and yet she is paying $4,500 in asset-based fees every year. If her advisor was required to place the client’s interests first, the account would probably have to be restructured to reduce costs.

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    De Goey

    I’m all for a Fiduciary Standard across the Board. As it is, some groups (like FPSC) are pushing to have their designates recognized (and held to the standard of) fiduciaries. Having a two-tiered system is silly. all advisors shoyuld be held to the same standard, otherwise, the less reputable ones will simply move to the lower standard and consumers would be at risk.

    Furthermore, as noted in the article, there’s a small mountain of empirical evidence that demonstrates the negative correlation between cost and long-term expected perfromance. A Fiduciary standard would at least require that that correlation be made transparently instead of the current “as me no quesitons and I’ll tell you no lies” approach taken by a large number of advisors.

    Wednesday, Jul 6, 2011 at 11:50 am Reply


    Although the industry–both domestically and globally–is moving towards a fiduciary standard care, should be taken not to abandon the ‘transactional’ client or a client that willingly trades growth stocks with an advisor who has expertise in this sector–whether it be resource, biotech or hi-tech in nature.
    This is slowly becoming an neglected part of the retail industry due to matters of cost and compliance risk. However, it should not be forgotten that venture capital is the essence of the capitalist paradigm–the foundation from which everything else in the industry stems from. The allocation of capital between risk takers and exploration and innovation entrepreneurs is paramount to the success of capital markets.
    Obviously, the issue of suitability is an investment principle that has to be clearly established in the opening and operation of a transactional account, but the universalization of a fiduciary standard would not be appropriate or effectual in such instances.
    It is important that the industry recognize the importance of the junior resource-technology sectors of the markets and endeavor to accommodate traders and investors who are willing to assume the risks involved–even though it may lead to higher costs and compliance issues–That is the essence of capitalism.

    Wednesday, Jun 8, 2011 at 5:48 pm Reply