The fiduciary standard is getting a lot of attention in the United States once again as the Department of Labour’s rule requiring advisors to act in the best interests of their clients was denied by an appeals court. The most interesting aspect of the debate on these standards is not whether a fiduciary standard will ever be applied, but the increase in public awareness for this issue. As more retail investors become aware of the different standards, it is important for you to be prepared to answer the inevitable question: Are you a fiduciary?
Many investors assume financial advisers have a duty to act in their best interests yet that is not necessarily true. The requirement in Ontario, for example, is to act "fairly, honestly and in good faith" which is known as the duty-of-care model.
The fiduciary standard is much stricter than the "suitability standard" that applies to brokers, insurance agents, and other financial professionals. The suitability standard only requires that as long as an investment objective meets a client's needs and objectives, it is appropriate to recommend to clients. A Fiduciary duty is a commitment put the clients' best interest first.
Canadian regulators have been reluctant to move to an industry-wide fiduciary standard partly because some of the new standards being proposed in other countries have been in place in Canada for some time. The existing duties and obligations imposed on investment professionals, together with the rules developed through the CRM project, provide investors with significant safeguards in their financial dealings with registered investment professionals. As it stands, the only Canadian financial professionals who are under fiduciary obligations to act in the best interests of clients are those registered as portfolio managers with discretionary authority over their clients’ accounts.
Canadian securities regulations place different standards of care upon financial advisors depending on how they act on behalf of their clients. Currently there is no single standard that applies to all advisors. Advisors fall under these two registration categories on the Canadian Securities Administrator’s national registry search:
Dealing Representative - This category includes virtually all Investment Financial Advisors. Regulations only require them to ensure that investments they recommend are suitable for their clients.
Advising Representative - Held to a fiduciary standard.
This lack of uniformity can create a fundamental misunderstanding between the expectations of investors regarding the duty that is owed to them by their financial advisors. If nothing else, the fiduciary duty debate has increased public awareness. Now, more than ever, prospects are questioning not only the qualifications of advisors, but also how they are compensated as well as their philosophy on how they run their practice. A prospect wants to know if you are truly serving their needs or are you pushing products.
Fiduciaries are different from other financial advisors structurally, philosophically and legally. Due to the extensive requirements it takes to become a Portfolio Manager (including qualifications and experience) it is unrealistic for most advisors to get registered as such. So, the reality is that most advisors cannot say they are bound by fiduciary standards. Yet there is a way to address this which would give your clients peace of mind. Advisors who outsource portfolio management and compliance responsibilities to a discretionary Portfolio Manager like Provisus Wealth Management can assure their clients that they are being cared for by money managers with a fiduciary responsibility to act in their best interests.
For more information, visit transcend.ca. Financial advisors can visit transcend.ca/advisor.