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.

Read: CSA paper examines advisor fiduciary duty

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.

Read: IIROC wants advisors to justify comp

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.”

Read: CSA to scrutinize mutual fund fees

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.”

Read: Improve communication with investors: Regulators

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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Appreciate that you don’t sit on a fence regarding the CSA implementing a fiduciary standard.
Also appreciate you have an advisor audience.

I just wished you galvanized your influential voice to promote a constructive conversation around improving client-advisor alignment rather than shooting it down in your editor’s note.

At a juncture where many Canadian & International investors are questioning the value of financial advice and seeking more transparency, the notion of a fiduciary standard seems worthwhile.

Implementing such a significant change will have warts and costs associated but is it really all bad?

What other alternatives would you recommend to improve the stewardship for individual Canadian investors? Or do you view it as a non-issue where caveat emptor should prevail?

Thursday, Dec 20, 2012 at 10:50 am Reply


Hi Melissa,
As you have pointed out in your article relating to poor financial literacy of investors (keeping in mind these are adults who manage many other responsibilities in life) and advisory services fiduciary duty to which I have commented in your publications in the past, the issues at hand for some reason are narrowly focused on investment advisors. The touch point for managing money covers all financial institutions including banks, trust companies, credit unions, life insurance companies, investment firms represented through different channels in the marketplace.

The responsibilities to the consumer to ensure the best interests are served should include all types of advisors from the bank teller to bank savings advisor to bank manager to mortgage advisor to investment advisor inclusively.

In all this debate on transparency of fees being charged to the consumer to acquire financial instruments I do not hear anywhere the Canadian Bankers Association advocating how much they charge a customer for a GIC. Have you heard anywhere a voice for ensuring the advice being given to the investor-saver at the branch is in their best interest?

There is no recognition being acknowledged by the CSA or another government based industry group that the field of services and representations for financial products is no longer the 4 pillars of the past thus this aggregation of offerings must apply rules of engagement on an equitable basis.

Just my 2 cents worth!

James R. Taylor

Thursday, Dec 20, 2012 at 10:40 am Reply