CFAs question advisor ethics

By Mark Noble | September 8, 2009 | Last updated on September 8, 2009
4 min read

Canada’s Chartered Financial Analysts (CFA) may be neither impressed nor disgusted with the ethical behaviour of Canadian market players, but a new survey finds charterholders reserve particular condemnation for Canadian financial advisors and enforcement regulation in the country.

According to the CFA Institute’s Canadian Financial Market Integrity (FMI) report, the opinions of charter holders who work in Canada have changed very little, while their U.S. and U.K counterparts showed substantial losses of confidence in the integrity of both market participants and the institutions that govern them.

On a scale of one to five — with five being “completely effective” — Canadian CFAs gave an overall financial market integrity score of 3.1 to the Canadian marketplace. Last year, they gave the Canadian market a 3.

“The perception respondents had in 2009 about the U.S. and U.K. markets, for instance, declined greatly from the 2008 FMI Index, signifying a loss of faith in both the individuals and the investor protections in their respective markets,” the study says. “The stable ratings for the Canadian market suggest that respondents believe that the integrity of their market has not changed appreciably over the past year and that, unlike other markets, Canadian respondents do not appear to blame Canadian professionals or market institutions for the current global financial crisis.”

Still, a score of 3.1 isn’t exactly a ringing endorsement of the Canadian market. The study suggests high levels of dissatisfaction with Canada’s regulatory enforcement and the competence of Canadian financial advisors.

Advisors raise concern

When it came to rating all market participants in Canada, Canadian CFAs gave a score of 3.4. Financial advisors to private individuals were given a score of 3, barely beating out sell-side analysts and hedge fund managers who were ranked a 2.8 and 2.6 respectively.

The comments from individual CFAs who participated in the study contain numerous criticisms about Canada’s advisor community.

When given the opportunity to comment on the ethical behaviour of financial professionals, most of the comments focused on financial advisers. Concerns were primarily centered on the competence of advisors to offer investment advice and whether their compensation schemes really had the client’s interest at heart.

“Investment advice should be provided by investment professionals,” wrote one survey respondent. “Unfortunately, financial/investment advice is too often being given by salespeople with little experience/training.”

Another respondent argued that advisors were not able to offer objective advice using a predominantly commissioned-based compensation model.

“The compensation system for financial professionals needs to be changed. All fees should, like a dentist’s or lawyer’s fees, be billed to the clients. This is especially true for financial advisors to private individuals who extract enormous fees for distribution unseen to clients as they are bundled as part of mutual fund management fees,” the respondent wrote.

Or as another respondent put it: “Any product sold to an individual investor (who rarely understands the markets) should have LARGE disclaimers on issues of risk, lock-ups, etc. At this point, these issues are hidden in the fine print that never gets read.”

Opinion on regulation improves

With the exception of accounting standards, Canadian respondents have a more positive view about the effectiveness of regulatory and investor protections in 2009 than they did in 2008. That said, their marks remain quite low.

Corporate governance standards, financial transparency standards, legal protections for investors, regulatory systems and shareholder rights standards all received marks below 3.

“The Canadian regulatory system earned the most criticism — 86 comments. These concerns focused mostly on two issues: The need for better regulatory enforcement in Canada and the fractured regulatory environment in Canada — with many calling for a single securities regulator,” the study says.

One respondent emphasized that Canada is far too lenient on investment related misconduct, considering the damage it causes.

“When investment professionals engage in unethical behavior, they can and do ruin many peoples’ lives, yet the punishment they receive is very light — if any. Common criminals (non-violent crimes) harm far fewer people and receive far harsher sentences. We treat financial crimes as if there were no victims,” they wrote.

Another respondent said Canada needs one regulator that employs people with a better technical knowledge of the capital markets.

“Canada needs to go to one regulatory body of qualified individuals. There is currently one per province, and many of the individuals are not financial market professionals, so they do not understand the nuances of the market.”

Still, CFA charterholders in Canada remain committed to investing in Canada. Almost three quarters of respondents (72%) said they were likely or very likely to invest in Canada. This number is down from 79% who held this view in 2008.


Mark Noble