As we described in our recent post, “Stop following conflicted advice,” financial regulators have been discussing whether everyone offering investment advice should be required to do so in a fiduciary manner. This begs the question: What is fiduciary advice (and why does it matter)?
In its broadest definition, fiduciary advice must always be delivered with your highest financial interests in mind. This should come ahead of any other agendas, including (perhaps especially) your adviser’s own profits.
Portfolio Managers (such as yours truly) already are required to serve as fiduciary advisers to our clients, and have been since April 2008. For some time, the Canadian Securities Administration (CSA) has been seeking to hold all financial representatives to a similar fiduciary standard. In 2012, it published Consultation Paper 33-403, “Exploring the appropriateness of introducing a statutory best-interest duty when advice is provided to retail clients.”
Whew, could that title be any longer? The CSA has now published an April 2016 follow-up: “Proposals to Enhance the Obligations of Advisers, Dealers and Representatives Toward Their Clients.” Tucked away in Part 5, page 10, the CSA describes five problems with the less-than-fiduciary “suitability standard” under which most investment advice is currently being dispensed. Here is our summary of its findings:
- Investors are being misled. The CSA found that “most investors incorrectly assume that their [advisers] must always provide advice that is in their best interest. As a result, clients have misplaced reliance or trust on [them].”
- Investors are being buried in red tape. Advisers are already subject to rules about disclosing their conflicts of interest, but the CSA is concerned that the rules are ineffective at best. At worst, they may lull investors into a false sense of security.
- Investors are being taken advantage of. The CSA calls it “information asymmetry.” Think of it as being like pitting my amateur skiing talents against this year’s Canadian Alpine Ski Team; I’d get snowed. Buying complex financial products from a profit-motivated bank or insurance company can be like taking the other side of a bet against a brilliant team of well-paid financial engineers. Who do you think is going to come out ahead?
- Investors are being underserved. When investors are taken advantage of, they may never even know it; excessive costs and poor performance are often hidden in the legal fine print. If you do discover you’ve been wronged, there may not be much you can do about it anyway.
- Investors are being ripped off. We’ll leave this one in the CSA’s own excellent language: “Clients are not getting the value or returns they could reasonably expect from investing.”
This final point is so significant; we’ll repeat it for emphasis:
Clients are not getting the value or returns they could reasonably expect from investing.
In light of these insights, it seems as if there is no need to continue “exploring the appropriateness of introducing” a best-interest, fiduciary standard for all would-be financial advisers. Why would you ever want to receive conflicted investment advice that detracts from your investment experience? Let’s just get it done.