It may soon cost more to give advice.
The Canadian Securities Administrators (CSA) has released a comment paper about implementing a fiduciary standard for advisors, citing several concerns:
- Clients don't know as much as advisors—and may be borderline financially illiterate;
- Investors incorrectly assume advisors and dealers always act in their best interests; and
- Current rules addressing conflicts of interest are inadequate.
When money changes hands, most people understand no party is completely impartial. But the paper, even though it claims no position, throws caveat emptor out the window.
It's doubtful a de-democratization of fiduciary advice is the CSA's intent. But, unless this industry starts pointing out where it's been effective in putting clients first, that could be the result.
"Advice for investing in securities is not just like any other business transaction," CSA says, "because many investors place substantial trust, confidence and reliance on the financial advice they receive."
That's true. But if, as CSA states, "poor financial literacy of investors remains a stubborn problem," can clients assert advisors deceived them if well-intentioned advice leads to a market loss?
The paper suggests the answer is yes, and then emphasizes that establishing a fiduciary duty would strengthen clients' abilities to sue.
To clarify where everyone's interests lie, one securities lawyer sarcastically suggested advisors go back to calling themselves salespeople—not out of bounds, given CSA says "many financial products must be sold to, not bought by, investors."
Building on the notion clients can't make objective choices, the paper asserts current suitability standards may be inadequate because they "may result in investors acquiring a 'suitable' investment but at an inflated price."
That potentially dangerous generalization could force advisors to always choose the lowest-cost investments, and ignore qualitative criteria like easy-to-understand reporting and good client service when selecting managed money products.
Worse, having to disclose every mitigating factor will make client meetings longer. You'll also spend more time with compliance getting your documents vetted. And, E&O insurers are sure to raise premiums in the face of rising litigation risks. Too bad the paper tersely warns against passing on any of those costs.
Our securities lawyer friend says such requirements and higher costs "will scare more people out of the business, good and bad."
The result: Fewer advisors, each taking fewer clients and forced to shift emphasis to the wealthy, since they're the ones able to write cheques for advisory fees.
Instead of helping all Canadians, this proposal will further rarify investment knowledge and curb access to face-to-face advice.
The good news is, you can comment on this proposal until late February. So, pick up a pen and Occupy Main Street.
Originally published in Advisor's Edge
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