* Regulators say more work needed before decision
* Industry, mutual fund companies oppose higher standard
* Investor advocates want change to end conflicts of
By Andrea Hopkins
TORONTO, Dec 18 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
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
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
But investor groups and even some advisers want to eliminate
the apparent conflicts of interest that can occur under the
"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
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
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
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
"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