Focus on Financial Planning

Keith Costello

Keith Costello is president and CEO of the Canadian Institute of Financial Planners (CIFPs) and the Canadian Institute of Financial Planning (CIFP). Over the past 15 years, Costello has led the creation of educational solutions, practitioner support services and advocacy support for financial planners.

Financial planners and advisors who are securities registrants will need to use financial planning principles to deliver investment advice

By Keith Costello |

The Canadian Securities Administrators (CSA) is proposing reforms to how investment advice is delivered to investors in a new consultation paper. The net effect of these reforms will be that investment advice will be delivered using financial planning principles to investors. Financial planners and financial advisors will need to give and execute investment advice in the future using the high standard of care, ethics and practice as dictated by financial planning certification.

CSA Consultation Paper 33-404 — Proposals to Enhance the Obligations of Advisors, Dealers & Representation Toward Their Clients outlines five investor concerns in the current regime under which investment advice is delivered:

  1. There's an expectation gap between investors and their advisors in which investors believe their advisors are always explicitly working in clients' best interest, whereas advisors are exaggerating the services they provide by using titles that overstate their proficiency.
  2. Investors are not getting the value or return that they could reasonably expect from investing due to advisors using a flawed suitability analysis.
  3. There are conflicts of interest in serving investors due to ineffective disclosure.
  4. There's information asymmetry in that investors do not understand the information and advice they receive from their advisors.
  5. Investors are not getting outcomes that the regulatory system was designed to give them due to the lack of effective compliance and enforcement.
     

Although most financial planners and advisors ensure that their engagement process protects their clients from these concerns, the small minority of those offside leads the CSA to propose various reforms. Here are the most salient ones for financial planners and advisors:

> Conflicts of Interest
There's no explicit requirement to prioritize the interests of clients when responding to conflicts. The CSA proposes that it be a requirement that priority is given to clients when conflicts arise and that the disclosure be prominent, specific and clear. Furthermore, a reasonable effort needs to be taken to ensure that the client understands the implications and consequence of the disclosed conflict.

> Know Your Client (KYC)
There's no specific requirement to collect certain key elements of investors' investment needs, objectives and financial circumstances. For example, the amount and nature of their debts. In addition, there's no requirement for risk profiling and updating the KYC on an annual basis. Thus, the CSA proposes an enhanced KYC process focusing on gathering client-centred information leading to a better understanding of the investor's needs in the following areas:

  • Investment needs and objectives, such as time horizon, liquidity and constraints.
  • Financial circumstances, including amount and nature of assets and debts, employment status, tax position, and spousal and dependents' status and needs.
  • Risk profile for clients' investment purposes based on risk attitude, risk capacity and loss aversion.
     

> Know Your Product (KYP)
There's no explicit requirement to know all products on an advisor's dealer list, comparison of products, all fees, costs and product charges as well as product and account investment strategy for the client. The CSA proposes that these elements be understood and considered in a client's suitability analysis.

> Suitability Analysis
This is currently "trade"-based, triggered by a product order or recommendation to buy or sell only. The CSA proposes the introduction of an enhanced suitability analysis that will consider the client's investment needs and objectives as outlined under the above proposed KYC requirements. Furthermore, the suitability must be monitored and modified on key events such as a significant market event.

> Proficiency
Titles and Designations: The CSA highlights that proficiency is lacking in compliance, investment analysis vs client outcomes, and the costs and risks of all types of securities. Furthermore, there's no annual requirement for continuing education in these areas. Increased proficiency is recommended in all these areas. In addition, the CSA contends there's limited regulation on client-facing titles that has allowed the proliferation of many confusing and competing titles. The CSA is proposing to regulate titles by type of advice so that the title is indicative of the service clients will receive. Furthermore, the CSA is considering provisions to ensure that designations meet a standard to ensure that they represent the specialized knowledge and expertise that the designation holder claims to hold out with.

These proposed reforms are extensive and, if they're adopted, will change the way investment advice is delivered in Canada. Specifically, they will bring the standard for giving investment advice closer to the way financial planning is conducted in the areas of standard of care, ethics and practice. Thus, advisors and financial planners who subscribe to the financial planning method and standards for advice will be well on their way to meeting these new potential investment advice standards.