Is your Financial Advisor a Fiduciary?
Most Canadians would be surprised to discover that Financial Advisors are not required to act in their client's best interests. Only a small percentage of Canadian Financial Advisors have a legal and regulatory obligation to put their client’s interests ahead of their own – this is called a fiduciary duty. If you haven't encountered the word "fiduciary" before, you can be forgiven - outside of legal or financial circles, most people aren't familiar with the term. If you're in the market to hire a Financial Advisor knowing who is and who isn’t a fiduciary is something you should know before making your final decision.
Fiduciary (Fu-deww-see-ary) defined.
A fiduciary is a person who has a legal responsibility to act in the best interests of another person. This is sometimes referred to as a 'fiduciary duty' or a 'fiduciary relationship'. Examples of fiduciary relationships include the one between a doctor and her or his patient, a lawyer and her clients, or a parent and their child. The essential meaning of what it is to be a fiduciary can be captured in one word - trust.
In Canada most Financial Advisors are not held to a fiduciary standard. Although it would seem logical to assume that Financial Advisors are required to act in your best interest - this isn't a requirement.
Under the law, a fiduciary duty is the highest standard of care required of a Financial Advisor. Fiduciaries must always act in their client’s best interests. Advice received from a fiduciary should be considered more trustworthy than that other advisors because they are legally obliged to:
• Avoid conflicts of interest. If a conflict is present it must be disclosed to the client. In these instances, a fiduciary is not permitted to proceed without client consent.
• Provide disclosure of all material facts. This would be information which "a reasonable investor would consider to be important."
• Ensure that services are performed with a degree of professionalism, care, and due diligence that would be expected of someone holding themselves out as an expert.
• Pursue an investment strategy and use investment products that only serve the best interests of the client.
• Compensation must be fully transparent - 'fee only'.
Advisors who do not act as fiduciaries aren't required to do any of these things - instead, they are only required to make recommendations that would considered 'suitable' for their clients.
Which Advisors are Fiduciaries?
In Canada, less than 5% of Advisors are held to a fiduciary standard. Or, more to the point, 95% of Financial Advisors in Canada are simply not required to act in their client’s best interests.
Among registered, licenced Advisors, only Portfolio Managers are considered fiduciaries. Portfolio Managers have discretion to buy and sell investments on your behalf without getting your permission for each transaction. In this respect, the Advisor-Client relationship has an extra layer of trust involved.
Another group of Advisors who have a claim on the fiduciary title are Fee Only Financial Planners. These Advisors are paid directly by their clients on either an hourly, project or retainer basis and are strictly in the business of providing financial planning services. They are not registered with a regulator and are therefore not permitted to provide investment advice. This means they do not receive compensation from the sale of products, removing any potential conflicts of interest and putting them in alignment with their client’s best interests.
Discretionary vs. Non-Discretionary Advisors
When buying or selling exchange traded investments (Stocks and ETFs, for example) an Advisor must receive verbal consent from the client, confirming: 1) the timing of the order; 2) the price, and; 3) the number of shares being bought or sold. Client consent must be given at the same time the order is entered.
When buying or selling mutual funds - the same general rules apply - verbal and in some cases written authorization must be given by the client before each transaction.
Portfolio Managers, on the other hand can be granted discretionary trading authority by their clients and do not require consent for each transaction.
According to IIROC, unauthorized, discretionary trading in client accounts is among the top five most common types of complaints received by regulators about IIROC regulated Advisors.
Why All Financial Advisors Aren't Held to a Fiduciary Standard.
The adoption of a universal fiduciary standard for all Financial Advisors would be a massively positive development for investors. It would reduce investment fees across the board, saving most investors 10's of thousands of dollars over their lifetime. These lower fees paired with superior, prudent advice would result in dramatically better investment performance and better outcomes overall. A fiduciary standard would also require a much higher degree of professionalism among advisors, raising educational requirements as well as advisor accountability. These are just a few of the societal benefits of implementing a standard of care most people already expect of their Financial Advisor.
So...why hasn't this happened already?
In 2018, after years of industry and consumer consultation the Canadian Securities Administrators announced that they would abandon the implementation of a statutory best interest (fiduciary) standard for Financial Advisors.
Stakeholders such as the Banks (Royal, BMO, TD, etc.) and other large investment dealers (Manulife, Sunlife, Investors Group) actively lobby regulators against changes to regulations which would negatively impact their businesses. In recent years much of this lobbying effort has been focused on preventing the introduction of a statutory best interest or fiduciary standard. There are three primary reasons for this: it would significantly harm the profitability of their wealth management divisions; it would increase their liability by an order of magnitude, and; these firms, more than any others aren't designed operationally to serve their clients best interests - in other words, compliance would require having to rebuild their businesses from the ground up.
Consider for a moment a firm like Investors Group (recently rebranded as IG Wealth Management) - one of the largest non-bank owned Investment Dealers in Canada. IG has a captive sales force - the majority of whom primarily sell mutual funds to their clients. Many of IG’s mutual funds are 'manufactured' in house (aka: proprietary products) and have very high management fees. IG’s very popular Dividend Fund is an example of one of these funds. According to Morningstar this fund has assets of over $12.2 Billion – making it among the top 10 largest mutual funds in the country - carrying a management fee of 2.8% annually. This is considered a generic, 'plain vanilla' mutual fund - there are literally hundreds of similar investment products in the same category, with almost identical holdings, objectives and risk levels. The only meaningful difference between the IG Dividend Fund and competitor funds is its cost to the investor and its resulting inferior performance . Whereas IG price gouges their clients, several competing products charge fees at a fraction of IG's 2.8% annual fee - the finest examples of which are Exchange Traded Funds (ETFs) such as - PDC, XDIV, VDY, with fees which can be as much as 90% lower than the IG Dividend Fund.
If a fiduciary standard were adopted, an Advisor employed by IG could not reasonably recommend a product which costs as much as 20X a comparable product. Firms like IG and the chartered banks would have to disclose all conflicts of interests when recommending the proprietary products which form the basis of their revenue models. These funds generate billions of dollars in profit for these firms every year (the IG Dividend Fund alone collects more than $325 Million in fees annually). With so much at stake its no wonder banks and firms like Investors Group will fight tooth and nail to defend their profits rather than do what’s right for their clients.
How you can tell if your Advisor is a Fiduciary?
1. Ask them. Some Advisors may not even be able to define the word - sometimes it 'takes one to know one'.
2. They use the title Portfolio Manager – this is currently the only registration category that carries a fiduciary duty.
3. If they aren’t a fiduciary, ask them why. They should be able to offer a clear and concise explanation.
4. Just because someone can’t call themselves a fiduciary doesn’t mean that they don’t carry some of the essential qualities of one:
- Their compensation is transparent – they are paid a fee (based on assets managed or services provided).
- They don’t recommend “proprietary products” – mutual funds that frequently share the name of the firm the advisor works for (ie: RBC Bond fund).
- They don’t recommend the purchase of mutual funds generally, and in instances where they do, they can make a clear case for doing so.
- They provide financial planning advice only and do not make investment recommendations or collect referral fees from investment advisors who they refer clients to.
5. They don’t work for a large financial institution or Insurance companies – advisors at large institutions are more likely to have conflicts of interests and sales targets than are independent advisors.
Finding an Advisor who is willing and able to act strictly in your best interests remains extraordinarily challenging – which is why SeekAdvisor.ca exists today. Large financial institutions and regulators such as the Canadian Securities Administrators and the Investment Industry Regulatory Organization of Canada (IIROC) are primarily interested in protecting the interests of the dealers who they regulate first - not the consumer. Anyone seeking financial advice will need to advocate for their own interests and ask their Financial Advisor the difficult questions.
Danny MacKay is the founder of SeekAdvisor, a former Bay Street Executive and Industry Insider turned Investor Advocate.