Financial advisors should be subject to a higher standard of care than they are currently, and should be guided by clear, well-defined principles of conduct, according to regulatory experts and industry group representatives.

At a Toronto conference that explored the advisor-client relationship, hosted by FAIR Canada and the Hennick Centre for Business and Law, panelists debated the prospect of imposing a fiduciary standard on financial advisors.

Widespread debates on this topic are occurring in several other countries, including the United States, Britain, and Australia. Speakers at Thursday’s conference expressed mixed views as to whether the standard should apply to advisors in Canada.

Some argued that the standards in place are sufficient, and that a fiduciary duty would simply lead to more regulatory ambiguity. Others argued that advisors, who are much more knowledgeable on investing than the average client, should automatically be subject to a fiduciary standard.

Most of the experts agreed that whether or not a fiduciary standard is imposed, it is critical to more clearly define the expectations around an advisor’s conduct.

“Anybody who holds themselves out as a financial professional should be subject to a higher standard than they are now, and irrespective of whether it exists in common law, it should be more clear and explicit,” said Cary List, president and CEO of the Financial Planning Standards Council.

List said the industry should move away from a discussion around fiduciary duty since there is too much uncertainty as to what exactly that duty involves.

“We’re all unclear on what we’re talking about when we talk about fiduciary,” he said. Instead, he said the industry should be focusing on the underlying principles of raising the standard of care.

Five core fiduciary principles were laid out by Knut Rostad, chairman of the Committee for the Fiduciary Standard in the United States, which is advocating for an extension of the fiduciary standard to all investment professionals who provide advice. The five principles include:

• Put the client’s best interest first;

• Act with prudence — that is, with the skill, care, diligence and good judgment of a professional

• Do not mislead clients — provide conspicuous, full and fair disclosure of all important facts;

• Avoid conflicts of interest; and

• Fully disclose and fairly manage, in the client’s favour, unavoidable conflicts.

List said all advisors in Canada should be subject to these five principles.

Although the committee has clearly defined these principles, Rostad said there remains widespread confusion in the U.S. as to what a fiduciary duty would mean. In particular, he said many industry members are concerned that it will include a crackdown on commissions – a move that was recently taken by Britain’s Financial Services Authority. But the U.S. committee does not propose a ban on commissions, Rostad said, since they represent a conflict that can be managed.

Whatever the principles are, they must be clearly communicated to both advisors and investors, according to Janis Sarra, a professor of law at the University of British Columbia.

“It’s in everyone’s interest to know what expectations there are of conduct,” she said. “We need to have more certainty.”

List called for the “professionalization” of industry, similar to the way the legal and accounting industries are considered professions.

“If they’re going to hold themselves out as professionals, they should be subject to a professional regulatory approach,” he said.

Peter Smith, head of the investments policy department at the Financial Services Authority, pointed out that efforts over several years to enhance professionalism in Britain fell short of what was necessary. Still, he said increasing professionalism was a “major step forward.”

Sarra said that defining standards and improving professionalism is becoming increasingly important since fewer investors have pension plans to rely on, and more investors are turning to the industry for retirement planning advice.

“The nature of investment is changing,” she said. “The carriage of investment is much more in the hands of the retail investor than ever before. That is only going to continue.”

IE