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So if you wrote 72 pages about this, it must be important. Can you tell me what the issue is in a nutshell? (Preferably, a nutshell that's shorter than 72 pages?)
Sure! Basically, FAIR Canada has been saying for years that investment firms and their advisors should have to act in their clients' best interests when they provide advice. Recently, a bunch of reforms have been suggested (the regulators call them Proposed Targeted Reforms) and some provinces are also asking whether there should be a Canada-wide best interest standard in addition to these reforms. We took a look at this and made a number of recommendations so that Canadians actually receive objective advice from professionals who have to act in the investor's best interest - because we don't think the current proposals will achieve that.
But hey, my advisor is a stand-up human being. Are you saying that she's not working in my best interest right now?
Hey, nothing against your current advisor - she might be great as an individual! But the way the industry is currently set up, there are a few major problems that mean that advisors might not be able to act in your best interests, despite their "best" intentions.
The current structure that your advisor operates in has a bunch of conflicts of interest baked in (more on that later!), and the proficiency standards - aka how much your advisor has to know - are pretty low. Those two things create an environment where you're getting financial advice that might be driven more by payments your advisor and her firm will receive instead of what would be best for you. If two products are "suitable" for you, the firm and its advisors can choose to recommend the one to you that pays them more, while the one not chosen may have cost you less, or been better in some other way.
We've made a set of recommendations so that anyone who calls themselves a "financial advisor" has to be legally bound to work in your best interest - not theirs - by making sure they don't get financial incentives from product manufacturers or others in the system. Those incentives are what might cause them to put you in products or give you advice that benefits them, but not you. Getting rid of these incentives (or "conflicts") would help make sure that firms and advisors work in your best interests.
Ok, so what you're saying is that my advisor might be a great person, but legally, there's no requirement for her to make me her first priority?
Exactly. The financial system has been allowed to have all sorts of conflicts of interest, that can lead advisors to provide advice or make recommendations that aren't always in your best interest.
The recommendation must be"suitable" for you under the current legislation. There's a big difference between "suitable" and "best."
So how are you proposing we fix it?
Well, we've got a few suggestions.
One is getting rid of embedded commissions and other sales incentives for anyone who calls themselves an advisor. Lots of Canadians own mutual funds, which have a built-in commission. Basically, the company that creates the mutual fund pays the the advisor) to sell it to you, and continues to pay them commissions so long as you keep holding the fund. These payments are called "trailing commissions" and they need to be banned.
We think that if some firms absolutely can't change their business model to make their advice objective and in the best interest of clients, they'll need to call their "financial advisors" "salespeople" (and not advisors) to make things crystal clear.
Second, we think it's important to increase the proficiency requirements, so that advisors have the knowledge and expertise to call themselves a professional. Again, if they don't? They're a salesperson.
Thirdly, and last but not least, we want to hold everyone who calls themselves a financial advisor to a legal standard that they act in your best interest - and increasing the oversight and punishments if they don't.
Ok, that all sounds pretty fair and reasonable - for me, at least. When is this happening?
Well, it's not happening just yet. These are only recommendations, that we made as an independent non-profit organization whose whole purpose is to look out for you - the Canadian investor.
This isn't happening? But I've heard so much about all these reforms happening in the financial world that are supposed to protect me.
It's true, there are new regulations now in place that aim to make things better for you by providing you with information - but they don't go far enough. The one you've probably heard of is CRM2, which stands for client relationship model. It will require that you get two new annual reports from your advisor, that are designed to help you understand how much you're paying for advice, and how much your investments are making. What it doesn't do is explain the conflicts of interest that exist nor does it eliminate the conflicts of interest that could skew the advice you get in the first place.
CRM2 gives these conflicts a pass, which leads to inefficiencies in the market (those are bad). It means that the market doesn't work competitively, so you end up paying more, or not getting the best products. It also leads to Canadians not getting the kind of investment returns they should be getting, which leaves you with a smaller nest egg for your retirement.
The Proposed Targeted Reforms also do not properly address conflicts of interest. The conflict of interest rule proposed wants the firm and advisor to prioritize the interest of the client ahead of the firm and advisor, but it allows the harmful conflicts of continue rather than being clear as to what is and is no longer permitted. It also relies too much on disclosure of conflicts rather than getting rid of the conflicts.
That's why we recommend a best interest standard, and why we put together that 72-page report.
My friend Jim doesn't have an advisor yet, but I know he's looking for one. Is a best interest standard and the other changes going to make it harder for him to find someone to help him with his money and his investments?
No - in fact if our recommendations are adopted it'll make it easier for Jim to figure out which professionals he should talk to because he will be able to know who is legally bound to put his best interests first, and who is caught up in conflicts of interest. Only people who work in Jim's best interest (and don't receive payments that put what they earn in conflict with what they are advising Jim to do) will be able to call themselves a "financial advisor". Otherwise, they'd have to call themselves a salesperson.
Under the proposed standards, it will be clear who is a financial advisor (she'll be able to give advice and act in Jim's best interest) and who is a salesperson. If Jim wants to see an advisor, he'll be able to find information, in advance, about what the advisor and his or her firm is going to charge Jim,, what services and types of products they offer (and don't) and any minimum investment sizes right on their website - which will allow him to shop around and will save him the hassle of calling and having to speak to possible advisors.
Wait up. I just talked to my advisor, and she said that this regulation is going to make it harder for Canadians to get advice about their investments. Is that true?
No! These types of standards have been implemented in countries around the world, and people are still able to obtain investment advice from an advisor. Some people have also decided, rationally so, that they didn't want to pay what some firms were charging, so they went elsewhere.
Other countries that have reformed the investment industry have also seen a rise in new, more cost-effective ways for the investment industry to serve investors while playing by the rules. Product costs in other countries have come down too, and people are receiving better advice - since conflicts of interest are reduced.
If anything, this change will create opportunities for the industry to evolve to a place where they can be what they say they are: professionals.
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