What is financial planning? Answering this question is important for both advisors and regulators to ensure clients get the best service.
Unfortunately, an answer is missing from the Ontario government’s consultation on title reform for financial planners, says the Investment Industry Association of Canada (IIAC).
This is an issue, IIAC says in its April 16 letter for the consultation, which launched in March, because the government’s proposals are based on the need for tougher oversight of people “who call themselves financial planners” and who “may not have the necessary proficiency requirements and appropriate oversight” to offer advice as a planner.
However, the government hasn’t articulated “what the activity is they are intending to capture,” it says, and more clarity is needed around the definition of financial planner.
One of the questions in the government’s paper for commenters, under “Membership Information,” asks advisors and firms to provide an explanation of the planning services they provide.
A definition for financial planning is included in the final report from the expert committee to consider financial advisory and financial planning policy alternatives—a committee that was mandated by the government in 2015 to offer recommendations—but it’s unclear whether officials have adopted the same meaning for the latest consultation.
That final report, dated Nov. 1, 2016 but delivered in March 2017, was used as the basis for the consultation and offers the following explanation:
“Financial planning or financial advice: any review and analysis of a consumer’s: current financial and personal circumstances; present and future financial needs; priorities and objectives; the risks associated with his or her current circumstances; future needs; objectives; and, priorities which can but need not include the establishment of strategies to address and mitigate these matters whether or not a formal financial plan is prepared.”
This broad list of services could be offered by those who hold themselves as planners and those who don’t. This is why the government has stated its intention to also look at other, similar planner titles, including those that use the terms “wealth,” “portfolio” and “asset management,” among others, in connection with financial planning.
In its letter, IIAC points out that “focusing on titles alone, without determining whether in fact an individual is providing [an] activity that falls under a definition of financial planning, does not fully address the issue and, ultimately, would fail in one of the government’s key objective[s] of protecting consumers.”
As a result, IIAC recommends that the government “provide clarity as to who is captured and subject to regulatory oversight” by stating its definition.
That would clarify how the government’s proposals could be extended “not only to those who hold themselves out and/or use the title of financial planner, but also to anyone who provides comprehensive financial plans to clients.”
IIAC defines a comprehensive financial plan as “a complex written plan prepared as part of an integrated financial planning processing [sic] encompassing areas such as financial management, insurance, risk management, investment planning, retirement planning, tax planning, estate planning and legal aspects.”
Unlike basic investment and retirement plans, complex plans are part of “an integrated process” that includes “a deep dive into areas including tax, estate and all types of insurance,” it adds.
Overall, IIAC says it wants to “comment more fully on both the restrictions regarding the use of the financial planner title and the proposal to prohibit titles similar to financial planner, once the government provides a definition of the title.”
Credentials and other regulatory changes
IIAC also contests the expert committee’s position that there’s a lack of adequate oversight for financial planners. The committee said in its 2016 report that the requirements for credentials, such as CFP, “can vary considerably, with some credentials significantly more robust than others.”
IIAC points out in its commentary that its members are IIROC-regulated and, as such, are expected to have “acceptable financial planning credentials.” The association says it will provide additional comments on recognized credentials as the proposed framework develops.
Regulatory changes in the works are also significant, says IIAC. The Canadian Securities Administrators’ upcoming targeted reforms, for which an update was delivered in May 2017, are also zeroing in on advisors’ titles and whether they can be limited.
If CSA “limits the number and use of the titles currently in existence,” and in doing so shifts the industry’s focus away from the term “planner” for those it regulates, the Ontario government’s work as currently proposed “may be moot,” says IIAC.
If Ontario doesn’t work with other regulators and provinces, it will fail “to address the national scope of many of [IIAC’s] members and the need to harmonize regulation of financial planning across all Canadian jurisdictions […],” the letter says. That would result in “fragmentation, client confusion and inefficiencies in the system.”
Along with asking for further clarification on how the government will regulate planners, IIAC made the following suggestions.
Require regular reviews of the list of regulated titles. “Any proposed list of prohibited titles would need to be subject to a regular review period to not only review whether any new titles develop that should be prohibited, but allow large organizations adequate time periods to revise and make changes to their internal systems to addresses these changes,” says IIAC.
It suggests a review period of three to five years and the ability to order ad-hoc reviews where necessary. It also asks which industry body would regulate titles.
E&O insurance is crucial. Along with satisfying proficiency requirements, all credentialed financial planners captured under the government’s proposals should have to acquire errors and omissions (E&O) insurance,IIAC says.
“E&O insurance will allow consumers to receive financial compensation in the event that they are harmed by the actions or negligence of their financial planner,” it writes, adding that “a protection or compensation fund” for investors is also needed.
Don’t reinvent the central database wheel. The government says “important information about financial planners is fragmented and hard to find.” IIAC recommends extending the National Registration Database (NRD)—which applies to individuals or companies “whose business is trading, underwriting or advising with respect to securities and who are required to register annually with one or more of the provincial securities regulators or IIROC”—to include financial planners.
What about robo-advisor growth? The government’s consultation asks commenters about “rapid growth in the creation and provision of technological innovations related to financial planning.” However, IIAC isn’t sure why—or how—the government will deal with this trend. When planners use technology as part of their process, how will that be accounted for?