This article was written by Michael Bookman and Ellen Bessner. Michael Bookman is an associate at Babin Bessner Spry LLP.
There are many questions regarding fiduciary duties that may arise between a financial advisor and a client. The law is not always clear on when these duties arise and, when they do arise, how financial advisors can discharge these duties to their clients.
When we speak with financial advisors, they tend to have one thing in common: they entered the industry because of their desire to provide good service. Each has an abiding commitment to providing the best possible service to their clients in one of the most important aspects of their lives – their finances.
But with this important commitment comes an important responsibility. Some clients will come to advisors in very secure financial positions with an appetite for risk. Others will be more vulnerable; their finances and investment profile may not be able to sustain any risk, or they may have some other vulnerabilities that a financial advisor may become aware of.
Financial advisors know that they may have important duties to their clients, especially in some unique situations with vulnerable populations, and many advisors will ask what the nature of those duties are in the eyes of the law. In certain situations of vulnerability, a special duty arises – the fiduciary duty.
These duties are not always well-understood.
Who is a fiduciary?
A fiduciary is a person who has special relationship of trust with another person. This special relationship of trust can arise in a number of situations, and it requires the fiduciary to act in the best interests of the other party to the relationship. If a fiduciary relationship is found to exist, the fiduciary is held to a higher standard for looking after the interests of the other party.
Do fiduciary duties always apply to the financial advisor-client relationship?
In short, no. In Canada, the specific financial advisor-client relationship does not automatically attract this kind of duty. The existence of a fiduciary duty would depend on the facts of the relationship itself: i.e., what are the reasonable expectations of the parties to the relationship? Is there a degree of vulnerability, trust, reliance or other dependency on the party who is in a position of power? Did one party put his trust in the other party to look after their best interests? These are some of the things to consider in determining whether a fiduciary relationship exists or not.
If, for example, a financial advisor has a senior client who may be experiencing a decline in their mental faculties as they age, that kind of relationship might attract fiduciary duties.
A fiduciary duty will almost always arise where the client has a discretionary account managed by a portfolio manager. Otherwise, a fiduciary duty may arise where the client has a non-discretionary account, but the advisor or dealer has real power or influence over the client and where the client relies on the advisor or dealer. The Canadian courts have noted that the advisor/dealer-client relationship falls along a continuum of providing advice, from the simple execution of client transactions all the way to discretionary accounts. The closer the activity is to the discretionary account, the more likely a fiduciary relationship may exist.
What kinds of obligations exist for a financial advisor who has fiduciary duties?
There is no set list of duties that must be discharged or fulfilled by a financial advisor in these circumstances. Existing regulations for financial advisors already require them to disclose their fee arrangements and to get the consent of their clients.
To the extent that a fiduciary duty does arise, any conflicts of interest that are identified must be resolved in the client’s interest.
Some have called for a legislative enactment to codify a fiduciary duty for financial advisors. To date, this has not happened. Financial advisors are already highly regulated by various regulatory bodies whose primary responsibility is to protect investors – either coming from the provincial securities commission or an industry-specific regulator. To date, courts have only applied a fiduciary duty to financial advisors in specific circumstances where the facts of a case revealed a special relationship of dependency between the advisor and the client.
In addition, dealers are responsible for maintaining systems that ensure regulatory compliance. Dealers are often good sources for assistance in determining how to mitigate risks associated with client relationships that may require more attention and responsibility.
How do I reduce the risk of breaching a fiduciary duty as a financial advisor?
Financial advisors have long-standing duties to act fairly, honestly and in good faith with their clients. They also have ethical and conduct requirements when doing business with their clients. They must be vigilant when it comes to identifying conflicts of interest, disclose their compensation structure and ensure the appropriate supervision over client accounts.
Best practices dictate that financial advisors maintain frequent and comprehensive communication with their clients. This will ensure advisors are aware of their clients’ circumstances, instructions and goals for their investment program, and their well-being. If financial advisors maintain this awareness and maintain open communication with their clients, they will become more responsive to their clients’ wishes and reduce any risk that they are not discharging their duties to their clients, fiduciary or otherwise.