Getting real about a fiduciary standard

When securities regulators should be advancing the ball toward a goal, it looks instead as though they are just kicking it aimlessly down the road.

The Canadian Securities Administrators (CSA) finally addressed the long-simmering subject of whether financial advisors should be required to act in the best interests of their clients with the publication of a comprehensive, albeit inconclusive consultation paper in late October.

This paper lays out a compelling case for a statutory fiduciary duty, but then backs away from the obvious conclusion. There are legitimate criticisms of such a change. But the CSA would be more constructive if it could address an actual policy proposal, not just a brainstorming session.

The investment industry doesn’t want to see regulators introduce a fiduciary duty. And why should it, when the overwhelming majority of investors already believe that they are currently owed a fiduciary duty by their advisors. The investment industry is already getting most of the upside of a fiduciary standard – the veneer of professionalism and trust that engenders – without any of the bother of a legal obligation.

Instead, industry members warn that a fiduciary obligation would raise costs, limit clients’ access to products and restrict the availability of advice.

Firms already ration the supply of advice and financial products – and regulatory costs surely play a part in those decisions. But the idea that firms can afford to operate only if they are permitted to work in their own best interests is deeply cynical – and depressing.

Given everything the regulators know about Canadians’ financial illiteracy and client vulnerability, they should be working on the appropriate scope of a fiduciary duty, not simply raising the question.

The question of misaligned incentive structures is also an issue. Most people working for the regulators don’t have retirement worries: they have well-funded workplace pensions and lucrative industry jobs to turn to when they’ve had their fill of public service. If their pay was somehow geared to the average Canadian’s portfolio performance or retirement income, perhaps they’d take the task of investor protection more seriously.