One of the issues in wealth advising and planning is the regulation of those who provide financial product sales advice and financial planning services—often offered under the nomenclature of estate planning or retirement planning advice. A lot has happened recently in many jurisdictions, including Canada and the U.S., as regulators grapple with what standards should apply to those who offer such services.
One of the burning issues is whether a statutory "best interests" standard should apply.
Following the lead of the U.K., Australia, and the U.S., some
jurisdictions are now considering adopting the "fiduciary
rule". In the U.S., the Obama administration proposed adoption
of the fiduciary rule, but the Trump administration ordered a
review of the rule which delayed its implementation which otherwise
would have come into effect in April 2017. Subsequently, the U.S.
Securities and Exchange Commission finalized a rule package on June
5, 2019 that includes a best interest standard for
broker/dealers.
Regulation Best Interest requires that a
broker/dealer may not put its financial interests above those of a
client when making recommendations. It includes a transition period
until June 30, 2020, to give firms time to comply, and despite
Covid-19, it appears to be on track.
As well, the U.S. Department of Labor's fiduciary rule was
slated to come into effect on June 9, 2019, but it was vacated
because of a court decision. It then advised it would issue a
revised rule to replace the one that had been vacated. Advisors are
waiting to see whether a new improved rule will be proposed to
ensure consistency with the SEC's "Regulation Best
Interest".
Its fiduciary rule required anyone who provides retirement
investment advice for a fee to act in the best interests of their
clients and that all fees and commissions for retirement plans and
retirement planning to be clearly disclosed to clients. Prior to
these changes, many U.S. financial institutions had decided to get
onboard anyway to implement the best interests rule and they
recognized that client expectations demand it.
In the Canadian context, the Canadian Securities Administrators
("CSA"), which is the umbrella organization for 13
provincial and territorial securities commissions, after a lengthy
consultation process which examined standards of care and adopting
a best interest standard of care to replace the suitability
standard, ultimately decided in the last part of 2019 not to
do so.
The prior standard only required that clients be dealt with fairly,
honestly and in good faith and that investments be suitable. The
new obligations will codify "best practices" governing
the suitability of investments to be phased in over a two-year
period which began in December 2019.
The rules provide that advisors must address material conflict of
interests and put the clients' interests first when determining
the suitability of investments. More needs to be done with regard
to disclosure of compensation and fees. Ontario and New Brunswick
in the face of opposition had originally tried to push for an
overarching best interest standard, but then changed course in
favour of more targeted reforms.
A robust regulatory environment that protects investors and those
receiving financial advice as well as financial and estate planning
services is more important than ever, as aging baby-boomers are in,
or fast-approaching, their retirement years. In providing such
advice, clarity, transparency, and a well-regulated legal framework
are needed now more than ever.
It remains to be seen how the CSA and the Canadian financial
industry will address disclosure of compensation, no doubt a
hot-button issue. What is particularly concerning is how little
public and media attention appears to have been given to these
issues given the growing need for investment advice for our aging
population and to ensure the integrity of retirement planning for
Canadians. Here is a rare article, published in The Financial Post,
"OSC drops push for 'best interest'
standard as regulators propose narrower reforms."
The necessity for objective, independent financial advice in an
aging demographic where clients need a secure retirement and
unbiased investment advice to achieve it cannot be questioned.
There is a broad-based lack of understanding within the public with
regard to conflicted advice, hidden commissions, the amount of fees
charged, and what their advisors' obligations are.
Is Canada lagging behind on these issues, given the direction of
the U.S., the U.K., Australia, and the EU to adopt either the
fiduciary rule or stringent standards and disclosure, in particular
when it comes to fees and compensation? Will we be viewed as a
backwater when it comes to investor protection and are Canadians
getting enough transparency from their financial advisors,
particularly when it comes to fees?
Originally published 11 May 2020
Margaret has been an expert columnist for Advisor.ca and Advisor's Edge magazine since 2011. You may read her columns here.
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