Is a statutory best interest duty for advisors needed?

The title of the consultation paper is just as confusing as the issue itself. The main feedback from a majority of the respondents focused on three pertinent questions: What is a statutory best interest duty? Is a statutory best interest duty really a fiduciary duty? And how can an effective statutory duty be defined? These are all fair questions as the undertaking to design a statute in law or rule vs relying on the experience of case law is not a trivial project. One of the strengths of case law is that it allows for better subjectivity for each specific case and allows the overall law to evolve over time as new cases bring more perspective to the issues.

If we accept that a statutory best interest duty could be designed and implemented, then, is one really needed?

The arguments for and against were quite varied with five main groups debating the issue at the roundtables:

• Consumer advocacy groups supported a strong statutory best interest duty for financial advisors and their dealers as they felt that the current investor complaint and resolution system is slow, costly, ineffective and weighted against consumers seeking restitution when they have be wronged. They contended that a statutory best interest duty will bring certainty and simplify the resolution process as well as be cost effective for consumers.
• The financial planning advocacy groups generally supported a statutory best interest duty and highlighted that they already put their clients’ interests first as dictated by their code of conduct and standards of practice required through their certification. Although supportive, they were concerned that the application of a statutory best interest duty will not be uniform across the financial services industry as this is a securities only initiative, not applicable to all advisors and burdensome to their practices if not designed and implemented properly.
• Other nonfinancial planning advisor groups were less supportive as they felt their code of conduct for their members already ensures client interests are put first and a new statutory best interest duty will be burdensome and is not needed;
• The legal experts questioned how the standard could be effectively designed and whether the common law case system already serves investors and clients well.
• The financial services industry itself — defined as product manufacturers and dealers — outlined that a statutory best interest duty will be costly, burdensome and may restrict access to advice for investors. They contend, and are supported by legal experts in this matter, that all advisors will now have a high likelihood of being sued and that compliance and process costs will increase to reduce these threats. Furthermore, errors and omissions insurance for advisors will increase dramatically and restrict advice to investors.

In reviewing the debate among these various stakeholders, the most problematic issue, in which all agreed, was: Where do you delineate the application of a statutory best interest duty when giving advice? For example, can an advisor be held to this standard when he or she is giving limited advice when selling a product?

Most of the issues that the various stakeholders have raised are design and implementation issues. When we consider the main question of the need for a statutory best interest duty, everyone agrees that we need to put the clients’ interest first; the disagreement is in how we do it.

It’s obvious that financial planners who are certified as such can subscribe to a statutory best interest duty considering they conduct their client engagement under a very transparent and professional code of conduct, ethics and standards of practice, which could work well with such a new statute or law. Financial planners should take the next step in demonstrating that their clients’ interests always come first by supporting the adoption of this statutory best interest duty that the CSA has proposed.