‘Best interest’ costs spark industry debate

Some participants said they don’t believe that a statutory best interest, or fiduciary, duty will result in added costs because advisors and their firms already hold themselves to a high professional standard, which means they’ve already made the necessary investments in their business.

John DeGoey, associate portfolio manager, advisor, Burgeonvest Bick Securities Ltd. argued that any advisor who says they already work in the best interest of clients shouldn’t have additional costs with the adoption of a statutory duty because there will be no change to their operations.

“If people are acting as though they are fiduciaries then the services they provide will be identical and the cost of those services will be identical,” said DeGoey. “I cannot see how anyone can say, well, we’re doing this already and it’s going to have a big change in our costs or the services we provide.”

Furthermore, Andrew Marsh, CEO, Richardson GMP Ltd., said that the industry as a whole has faced increasing costs for years because clients are looking for more from advisors and their firms. In the past 20 years, advisory firms have had to make large investments in their firms, from computers, to new software and online services, said Marsh, and all because clients expect it.

“The demands from our clients and our industry has naturally driven us to a higher professional standard,” he said, “it has naturally increased the cost also to cover [ourselves] because we’ve become so litigious.”

However, other roundtable participants argued that whether or not an advisor thought of themselves as fiduciaries, a best interest standard would increase costs for firms because of the necessary compliance.

“They might be [following a best interest standard],” said Adrian Walrath, policy counsel, Investment Industry Association of Canada, “but they don’t necessarily have a system to show that they’re doing it.”

For example, the formal adoption of a best interest standard could require firms to adopt new documentation, supervisors and training, said Walrath, in order to prove to regulators and the courts that an advisor was acting in the client’s interest.

Even without the additional operational costs, the real expense in the adoption of best interest or fiduciary standard of care would come from the courts, argued Laura Paglia, partner with Torys LLP.

While most people in the industry at the moment use the terms ‘best interest’ or ‘fiduciary’ to imply acting in good faith or doing the right thing for clients, Paglia said, the courts will have very specific understanding of the meaning of those words, which will lead to an increase in liability for advisors and their firms.

“[Fiduciary] means something to judges and to lawyers in disputes, that’s the cost,” said Paglia. “The liabilities that [regulators are] opening up investment professionals to in the way, this will be interpreted by my ilk and my profession on both sides of the fence and those who decide those disputes.”