Most compliance officers (COs) and company executives surveyed for this year’s Regulators’ Report Card were opposed to the introduction of a statutory “best interest” standard, also known as fiduciary duty, for financial advisors. It would place too onerous a regulatory burden on advisors, they said, and have a detrimental effect on clients rather than the positive effect that proponents hope to achieve.
“Advisors might become so risk-averse that they may end up giving bad advice,” says a chief compliance officer (CCO) with a firm in Ontario that’s licensed to operate on the Investment Industry Regulatory Organization of Canada‘s (IIROC) platform.
In fact, 57% of the survey participants said they would not support the introduction of a statutory fiduciary duty on advisors, arguing that the current regulatory frameworks provide adequate protection for investors. Forty-three percent supported the adoption of such a standard, saying that clients already believe that advisors are governed by regulations that equate to a fiduciary duty.
In contrast, 60% of those surveyed don’t believe that the introduction of a fiduciary duty would have much effect on their businesses, saying that firms are already adapting in the current climate of ever-tightening regulations. On the other hand, 40% believe that fiduciary duty might represent a new and potentially significant area of risk for firms.
“It would open up the industry to an incredible amount of litigation,” says an executive with a mutual fund dealer in British Columbia.
The long debated idea of imposing a fiduciary duty on advisors is once again front and centre in the financial services sector, with the Canadian Securities Administrators (CSA) in the consultation phase of considering such a move. Imposing a statutory fiduciary duty on advisors would mean that a client’s interest would be “paramount” and put advisors more in line with other professions, such as law, that impose a similar regulatory standard on their members.
The Investment Industry Association of Canada and the Mutual Fund Dealers Association of Canada (MFDA) have serious concerns about the adoption of a fiduciary duty, arguing that current regulatory regimes are strong and that such a fiduciary duty might limit flexibility and choice for clients.
Report Card survey participants against the adoption of fiduciary duty said that it’s difficult to define what “best interest” for a client actually is: does it necessarily mean choosing the cheapest product option; or is “best interest” to be defined by other measures?
“Treating all [client/advisor] relationships as the same is not right,” says a CCO with an MFDA-licensed firm in Ontario.
Adds an executive with an IIROC-licensed firm in Ontario: “The best interest of my clients would be for me to do everything for free – that would be true fiduciary duty. There are enough regulations in place now that we don’t need fiduciary duty.”
Some survey participants contended that having a fiduciary duty in place would unfairly burden advisors with all the risk in the advisory process.
“There has to be some responsibility on the clients’ shoulders as well,” says a CCO with a mutual fund dealer in Ontario.
Survey participants also said that under a statutory fiduciary duty – and the implied liability risk they feel would come with it – some firms will have to drop clients with lower levels of assets, deeming them not worth the risk.
“Firms will want to pick and choose whom they advise,” says a CCO with a dealer in Ontario that’s regulated by both IIROC and the MFDA. “It will disenfranchise [clients] who need advice the most.”
Some survey participants view fiduciary duty as being less about sound policy and more a means for regulators to signal to the public and other stakeholders that they are being vigilant about investor protection.
“The CSA has not been able to articulate what it means [by fiduciary duty],” says a CCO with a mutual fund dealer in Alberta. “It can’t put it into words, which tells me that it really doesn’t understand what it’s trying to accomplish.”
Others support the introduction of fiduciary duty, saying it would go a long way toward providing the sector with a common and consistent standard.
“Historically, there has been a potential conflict of interest for advisors,” says a CCO with an investment dealer in Ontario. “A fiduciary standard would address that issue.”
Meanwhile, a CCO with an investment-counselling firm in B.C. believes that adopting a fiduciary duty would just make explicit what many clients and other stakeholders already believe is implied in the client/advisor relationship: “The courts have already established [that advisors have] a fiduciary duty in many cases, particularly involving vulnerable clients.”
Still, despite having strong opinions on the matter, most survey participants believe that the adoption of a fiduciary duty would have little to no effect on their businesses, contending that advisors at their firms already put their clients’ interest first.
“We already hold ourselves to a high standard,” says a CCO with an IIROC-licensed dealer in Atlantic Canada.
Others are less sanguine about the implications. Says a CCO with an IIROC- and MFDA-regulated firm in Ontario: “No insurance policy in the world could cover the [potential] malpractice costs.”
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