YOUR PRACTICE-Canadian regulators put off fiduciary duty standard

Wed Dec 18, 2013 1:49pm EST

* Regulators say more work needed before decision

* Industry, mutual fund companies oppose higher standard

* Investor advocates want change to end conflicts of interest

By Andrea Hopkins

TORONTO, Dec 18 (Reuters) - Canada's investment industry is gearing up for a final battle to kill a proposed regulation that would formally require advisers to act in the best interest of clients, a change that could eat into the profit of wealth professionals.

According to polls, most Canadian investors do not realize that advisers have no "fiduciary duty" to their clients. Instead of looking after the best interests of the investors they serve, advisers currently need only meet a "suitability standard," providing advice or selling products that conform with the investor's needs.

That's critical because advisers are now allowed recommend or sell an investment product that pays them higher commissions than comparable products as long as the product being sold is suits the client's needs. A "best interests" standard might compel them to recommend the product with the lower fee, all things being equal.

Facing a threat to their long-standing income model, most wealth professionals oppose the proposal, saying the industry is already heavily regulated.

The Canadian Securities Administrators, gave the advisers a bit of breathing room on Tuesday saying more work needed to be done before a decision is made. The regulator has been weighing the pros and cons since October 2012.

"This cautious and reasoned approach is the right course because there's so much at stake," Greg Pollock, president of Advocis, the Financial Advisors Association of Canada, said in a statement.

But investor groups and even some advisers want to eliminate the apparent conflicts of interest that can occur under the current standard.

"The problem right now is most product manufacturers - and most advisers who recommend products from product manufacturers - are protecting the interest of the product manufacturers and their profit margins, rather than their allegedly valued clients," said John De Goey, a certified financial planner and associate portfolio manager at Burgeonvest Bick Securities Ltd. "I want the new higher standard."

De Goey is among a minority of financial advisers who welcome a fiduciary duty as a way of distinguishing between product salespeople, who make a living by selling investment products, and financial planners, who provide advice and invest a client's money for a fee.

The embedding of fees in mutual funds is a separate issue being considered by regulators, who want more clarity in disclosure so investors can see where their money is going. Even so, the argument over fiduciary duty is also one that tends to come down to fees.

De Goey said a financial adviser may have a client who wants to invest in the equity market. The adviser can sell the client an equity mutual fund that charges a 2.75 percent fee, or an equity exchange traded fund (ETF) that charges 0.4 percent. Both are suitable, but only one is in the client's best interest if the goal is higher returns.

"That cost differential, depending on the size of the account in particular and the time involved in particular, can be massive," De Goey said.

"The industry talks around it because they make it sound like it is about other things, but really what they are doing is defending their right to legally charge high fees and clients are none the wiser."

Others argue the industry is far too complicated for a fiduciary standard, and certainly big changes would result if regulators tried to hold everyone equal.

Currently, anyone can call themselves a financial adviser and provide advice on investing or retirement planning, though only licensed advisers can sell products, including mutual funds.

If an investor wants to buy a particular mutual fund online from his discount broker or in person in his bank branch, should he really be prevented from doing so because it may not be in his best interest?

"The challenge in applying (a fiduciary duty) to advisory relationships is they come in very different shapes and sizes," said Laura Paglia, a Toronto lawyer specializing in securities litigation. She was commissioned by the big industry players, including the Investment Funds Institute of Canada and the Investment Industry Association of Canada to argue their case to the regulators.

She said investors can be more or less sophisticated, and want very different things from an adviser -- sometimes advice, sometimes just to buy a product for them. Some rely heavily on their adviser, some do not.

"To try to take all of these very different scenarios and apply one uniform fiduciary standard that assumes a high degree of trust and dependence and vulnerability in every circumstances poses challenges," Paglia said.

But advocates of investor rights argue clients often don't realize that their advisers are paid more if they sell one product versus another, and so are unaware of conflicts of interest behind the advice they get.

"Eliminating financial incentives will improve the client-advisor relationship," Ken Kivenko, chair of the Small Investor Protection Association, said in a submission to the CSA.

But regulatory reform is a particularly nettlesome process in Canada, in part because there is no national security regulators, and provincial regulators must work together to find consensus.

"The road towards implementing a fiduciary standard in securities regulation will be bumpy and there is no guarantee that such a standard will indeed be implemented," Anita Anand, a professor of business and law at the University of Toronto, said in an email.

"But as long as securities regulators continue to recognize that they have an explicit statutory mandate to protect investors, I believe that it is possible for Canada to get there."