Financial Advisors, lack of regulation holds consumers back

Randy Glasbergen cartoon - You're confused. That means I explained it properly.

In March, the Ontario government quietly released the Final Report of the Expert Committee to Consider Financial Advisory and Financial Planning Policy Alternatives, which the Liberals had been sitting on since November 2016. Whenever a report is released, without press, right before a holiday week like March Break, we should wonder what they are trying to hide.

This recent story by the CBC, about financial advisors with misleading titles, poor training and no fiduciary duty to act in the best interest of their clients, did not make reference to this Expert Committee report, which calls for a number of reforms to fix these problems. However, I was pleased to see this Globe and Mail article which reported on Finance Minister Charles Sousa’s announcement that legislation will be forthcoming to address the recommendations of the Expert Committee.

The talk about “Investor Protection” has been intensifying though it has often been just that – all talk and no action. Some change has started with the recent introduction of increased fee disclosure being one example. In my view, it’s about time that the policy makers start to act. Because of the low levels of financial literacy in society, coupled with the increased responsibility foisted upon individuals to secure their own retirement savings (where did all the DB pension plans go?), there is a growing need for advice and assistance.

Unfortunately, the financial services industry has a poor reputation for putting the customer first. This, along with a lack of uniform regulation across jurisdictions and product lines, has lead to confusion, abuse, distrust, and ultimately individuals not taking advantage of the very products designed to help them meet their financial goals.

The solution, per the Expert Commission, is a “tripartite” approach of harmonized regulations, prescribed use of titles and credentials, and a statutory best interest duty.  They submit that these changes, taken together, will have the following desired outcomes:

  • All financial planning and financial advice services regulated under a harmonized framework
  • Clear titles and established proficiency requirements for financial planning and financial advice
  • Mitigation of conflict of interest in advice provided to consumers
  • Strengthened consumer protection and confidence in the financial services industry

Consumers of financial products, often because of their very low levels of financial literacy, frequently presume that the financial advice that they are receiving is in their best interest.  According to the CBC story, only about 4,000 of the 121,000 individuals registered as financial professionals in Canada owe a fiduciary duty to their client. This “expectations gap” is a big problem and a uniform statutory best interest duty would go a long way to elevate the standard of care in the consumers favour.

Now, the trick in all this appears to be the implementation. Let’s hope that the Ontario Liberal government can move this along in a timely fashion, and who knows, perhaps they can not only convince the various regulatory bodies to work together for Ontario consumers but spread the good word across the country.

On a related note, besides constitutional history, can someone please explain to me why we need different financial regulations in each province? You would think that in today’s world it would make much more sense to have a single national financial services regulator!

Jason Vary
Jason Vary
Jason Vary, President of Actuarial Solutions Inc., has practiced in defined benefit pension and retiree health plans for twenty years. He has experience with many plan designs including single-employer, multi-employer, private sector, government, unionized, non-unionized, as well as registered and non-registered executive plans.

2 Comments

  1. Avatar Loyd zadorozny says:

    Interesting about only 4,000 of the 121,000 having a fiduciary duty. Hopefully, the upcoming legislation will change that and have financial institutions revisit their advice platforms. One key problem is that financial matters are very complex and not all advisors have deep financial acumen or strong educational credentials. They may be better at sales than financial matters and not truly understand the intricacies of pensions, government programs and risks such as investment return percentiles, death, disability, unemployment and divorce that require advance risk management planning. Another problem is the “know your client” rules are basic and result in advice being generic instead of tailored to an individual’s personal circumstances, except in the case of those with significant enough wealth to warrant the attention of the best advisors to draw large asset based and other fees. What is needed is broad based financial literacy education in addition to greater transparency of legislation. Good note Jason – thanks.

  2. Avatar Dan Hallett says:

    Very well stated Jason. When securities regulators proposed a best interest standard I made a formal submission in favour of this notion in concept but against actually implementing the idea. While our firm is (and I am) held to a legal fiduciary standard, securities regulation omits the growing numbers of insurance-only ‘advisors’ (regulated by FSCO & provincial counterparts) and unregistered advisors (not captured by any regulatory agency). While the initiative you highlight is only for Ontario, at least it casts a wider net to include any financial advice provider (including insurance and unregistered advisors). So I think it’s a good idea.

    As for your concluding question, the reason is politics. The Ontario Securities Commission had stated its intent to form a national regulator. Because the OSC is the largest, inter-provincial politics prevented this from moving forward. That said, the function of securities regulation is much more harmonized compared to a decade ago. And that’s really important.

    Loyd, the know your client (i.e. suitability) rules (which also apply to investment fiduciaries) appear to be more simplistic than they are. While the form that the client signs summarizing their objectives is highly summarized, the information that the advisor needs to obtain and analyze to sufficiently know each client goes far beyond the form that many have seen and signed.

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