Regulation of Financial Planners – Something’s Missing

Earlier this year, the Ontario government issued a Consultation Paper on the Regulation of Financial Planners (the “Proposed Regulations”) seeking comments on their proposals.  This follows from last year’s Final Report of the Expert Committee to Consider Financial Advisory and Financial Planning Policy Alternatives (the “Final Report”), which I discussed in my blog at that time.

Sadly, my view is that the Proposed Regulations fall short of the changes needed to protect consumers seeking financial advice.

The experts who wrote the Final Report recommended a “tripartite” solution of:

  1. harmonized regulations;
  2. prescribed use of titles and credentials; and,
  3. a statutory best interest duty.

The authors of the Final Report stressed the importance of this last point regarding the statutory best interest duty by saying, “we firmly believe that this duty should apply to all providers of financial planning and financial advice in Ontario, regardless of which body regulates them or what product they sell.”

According to the Ontario government, the Proposed Regulations aim to do the following:

  1. restrict the use of the title “Financial Planner” to an individual who holds a recognized credential that meets a number of criteria;
  2. prohibit titles similar to “Financial Planner”; and,
  3. create a central database of financial planners.

This is all good, especially the proposed criteria for a credential to be recognized.  These criteria include a clear focus on financial planning, requirements for education, examination & continuing education, a code of ethics and standards, and a disciplinary process.

However, where is the duty to act in the best interest of your client?

Consumers of financial products, often because of their very low levels of financial literacy, frequently presume that the financial advice that they are receiving must be in their best interest.  Unfortunately, this is not always true, and worse, the financial services industry has a poor reputation for putting the customer behind their own interests. 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.

While a fee-for-service model for financial advice can go a long way to remove conflicts of interest and bias when a financial planner is recommending products and services, this model doesn’t seem to be taking off.  One likely reason for this is that advisors can presumably make more money getting paid as a percentage of assets under management or sales commissions, especially from smaller account holders who can only afford to pay for the advice very slowly over their lifetimes.  However, studies have shown that investments that pay commissions exhibit different buying and selling tendencies versus investments in fee-based accounts, which seems to indicate that some advisors are directing money to investments that pay higher fees regardless of their performance.  That sounds like the behaviour of a self-interested financial advisor taking advantage of their clients.

That being said, we are likely stuck with the commission model in Canada, so to me the obvious answer is that we must institute a statutory best interest duty that applies to all financial planners to protect the interests of the consumers who are desperately asking for help saving for their future.  In my view, any good advisor should not be afraid of being held to a standard that puts their client’s interests first.  Now, if only the politicians would listen to their own expert advisors…

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.

1 Comment

  1. Dan Hallett says:

    Good post Jason. We didn’t make an official submission this time around but the Expert Committee is on the right track. To clarify, they propose that a best interest standard applies to everyone – licensed or unlicensed – including those who simply give advice without any kind of product sales. Also, those registered as Portfolio Manager (firms) or Advising Representative (individuals) are already held to that standard because PM firms have discretion over client assets.

    As for compensation structure, there is an embedded conflict with every model – even hourly or project fees. Your statement that fee-for-service hasn’t taken off; I assume you mean hourly or flat/project fees. If so, that model just doesn’t work – not because we’re all too greedy but because it is at odds with the behavioural benefits that good advisors bring to client relationships. The economics of a pure hourly model are not sustainable.

    Pure hourly fees are an incentive for clients to minimize contact with advisors. And yet clients need regular interaction not only for quarterly/annual reviews but also to discuss the worries/concerns that naturally emerge with most people as a result of the constant uncertainty in global economies and financial markets. While I often see references to getting advice and paying on an hourly basis, the industry’s current regulatory structure and resulting (direct and indirect) costs do not fit with a pure hourly fee model.

    The only potential model that is close is a monthly retainer model but I suspect the total that many firms would need to charge as a retainer will not be much different than the fee resulting from the prevailing % of asset fee total.

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