Why the Definition of Independence Matters in the Canadian Securities Industry

In 2023, we published an article in Investment Executive called “What Makes a Dealer Genuinely Independent? The Illusion of the Independent Dealer.” Just as the ocean has unexplored depths, this was the beginning of our journey into open water and reflection on the concept of independence.

Any definition of independence includes the state of being free from outside control and influence. However, independence can be challenging to define because it encompasses various dimensions and perspectives, each with its own nuances. Here are a few reasons why defining independence can be complex.

Independence can refer to various aspects such as financial independence, operational autonomy, and strategic decision-making. As a result, the meaning of independence can vary greatly depending on the context. For example, independence for an advisor might mean having control over decisions regarding their practice, while for a large dealer, it might mean being free from conflicts of interest. These factors make it difficult to pin down a single, clear definition of independence in the Canadian securities industry. Each situation requires a nuanced understanding of what independence means in that specific context.

In corporate governance, independence is crucial for roles like auditors and directors to ensure these roles are free from undue influence and comply with ethical standards. For accountants and lawyers, the concept of independence is also crucial, and it is generally well-defined and agreed upon within the profession. Given its ties to ethics and governance within highly regarded professions, like accounting and law, why does the investment industry not safeguard the meaning of independence to stay on par with its professional peers?

Agreeing upon definitions involves several key steps: Using a shared language and terminology is essential. Engaging in discussions to reach a mutual agreement on the meaning of terms is also crucial. This often involves compromise and collaboration. In many fields, definitions are standardized by authoritative bodies or through widely accepted references, such as industry standards. However, the concept of independence in the Canadian securities industry is used so randomly and wildly. Perhaps breaking down some of its perspectives will generate some momentum, so let’s explore some details to building out the spectrum in which the term independence is found.

First and foremost, we believe that the moment a dealer has its own funds to sell, that dealer should not propose to be independent. There is too great a financial incentive, and too obvious a target audience of theirs for their product to infiltrate. It’s just not possible to claim independence when a significant portion of a business model is dependent on the use of its own products over those its advisors would like to offer.

Second, if you are a public company, there is a significant influence that exists to appease shareholders and monitor for profits. While any company, public or private, is not wrong to be profitable for many excellent reasons, we know that external shareholders are most interested in profitability above all else.

Other nuances also jeopardize independence. For example, is an advisor required to have account minimums? Or charge a minimum fee? These outside influences instantly remove operational autonomy.

What about the ownership of the client? While in accounting and law practices clients are engaged in specific transactional undertakings (estate planning, tax returns), clients may come and go. In the investment industry clients generally pay ongoing fees in order to maintain the relationship and receive guidance and oversight of their investments in relation to their goals. This often creates a sense of ownership over the client however, in many cases, legally, the relationship is not owned by the individual who manages that bond and trust. How independent can you be when at anytime you can be swapped out and held to a non solicit? You may find yourself holding back on how you would really like to strategize to put the clients needs first because you risk retribution personally.

We also see industry taglines that propose that their advisors are “independent thinkers”. By nature, we all think independently. We are one brain, in one body, so in terms of form, anyone can express that they are an independent thinker. But the truth is, our independent thinking is influenced by all the factors above. So, while the superficial use of the word may be comforting to the public, the reality of the infrastructure could very well deny that same firm the privilege of using the word.

Writing down agreed-upon definitions helps ensure consistency. Definitions may evolve over time as new information and perspectives emerge. But we must start somewhere. These steps help create a shared understanding and reduce ambiguity in communication to the public.

So today, we start the debate with your help. Please reach out to us as we develop the continuum and scoring matrix for independence in the Canadian securities industry.